AL - City of Florence increases local tax ratesEffective March 1, 2019, the city of Florence increases the local Alabama sales and use tax rates for the following from 3.5% to 4.5%:general items;admissions to places of amusement and entertainment;...

The final regulations require the agency to inspect no fewer units than the number specified in the "Low-Income Housing Credit Minimum Unit Sample Size Reference Chart." The reference chart can be found in Rev. Proc. 2016-15, I.R.B. 2016-11, 435, and is borrowed from the U.S. Housing and Urban Development (HUD) Real Estate Assessment Center Protocol (the REAC protocol). Previously, an agency was permitted to inspect 20 percent of the low-income housing units in the project if this was lesser than the number required by the reference chart. This change addresses a concern that limiting physical inspections to 20 percent of units in small projects is not sufficient to ensure overall compliance with habitability and low-income requirements.

All-Buildings Requirement

No change is made to the requirement that an agency must inspect all buildings in a low-income housing project by the end of the second calendar year after the year in which the last building in the project is placed in service unless a project inspection is conducted under the REAC protocol. Suggestions that the IRS dispense with the all-buildings requirement for agencies not using the REAC protocol were not adopted.

Reasonable Notice Time Frame Shortened

A building owner and tenants are allowed a maximum 15 day advance notice that a project will be inspected. The temporary regulations allowed a 30-day notice period. The particular units to be inspected may only be identified on the day of the inspection. The 15 day advance notice limit will also apply to reviews of low-income certifications.

Amendment of Agency’s Qualified Allocation Plan

The final regulations are effective on February 26, 2019. However, an agency only needs to amend it qualified allocation plan by December 31, 2020, to reflect the requirements in the final regulations.

Rev. Proc. 2016-15 is obsolete with respect to an agency as of the date that on which the agency amends its qualified allocation plan.

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

The Senate’s top Democratic tax writer is calling on the IRS and Treasury to further waive underpayment penalties for the 2018 tax year. Nearly 30 million taxpayers are expected to have underpaid taxes last year, according to the Government Accountability Office (GAO).

Underpayment Penalty

The IRS announced in IRS News Release IR-2019-3 that it would waive the underpayment penalty for any taxpayer who paid at least 85 percent of their total tax liability during the 2018 tax year. The usual threshold is 90 percent. However, Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., has said that the IRS should "do more."

"Instead of penalizing those who paid less than 90 percent of what they owed in 2018, now they’re penalizing those who paid less than 85 percent," Wyden said on February 7 from the Senate floor. "That was one small step in the right direction," he added.

Before the IRS’s news release, Wyden wrote to Treasury and the IRS urging the waiver of underpayment penalties for withholding errors related to the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). Although the IRS did lower the penalty threshold for the 2018 tax year, Wyden stated on February 7 that "nobody should be penalized for the Trump administration’s mistakes on tax withholding."

Democrats are largely opposed to the TCJA as a whole, and claim that Republicans’ tax code overhaul was rushed. Thus, significant tax withholding errors and underpayments are expected to be incurred. "Change the penalty thresholds. Extend safe harbors. Whatever needs to happen," Wyden said.

Additionally, several Republicans have also voiced their concern about the expected increase in underpayment related to withholding. SFC Chairman Chuck Grassley, R-Iowa, recently urged the IRS to be "lenient" on underpayment penalties for 2018, as it is the first tax year since tax reform implementation.

AICPA

The American Institute of Certified Public Accountants (AICPA) has likewise urged Treasury and the IRS to provide more extensive penalty relief. "The substantial uncertainty surrounding the implementation of the TCJA and the updated federal tax withholding tables presented a challenge for many taxpayers in understanding and accounting for their tax liability," Annette Nellen, chair of the AICPA’s Tax Executive Committee said in a recent letter to Treasury and the IRS. The AICPA has recommended an 80 percent threshold for the underpayment penalty waiver.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Senators have introduced a bipartisan bill specifically tailored to reduce excise taxes and regulations for the U.S. craft beverage industry. The bill aims to promote job creation and permanently reduce certain taxes and compliance burdens.

Craft Beverage Tax Reform

The Craft Beverage Modernization and Tax Reform Bill of 2019 was introduced on February 6 by Senate Finance Committee (SFC) ranking member Ron Wyden, D-Ore., and Sen. Roy Blunt, R-Mo.

"By modernizing burdensome rules and taxes for craft beverage producers, this legislation will level the playing field and allow these innovators to further grow and thrive," Wyden said in a press release. The comprehensive measure is supported by the entire craft beverage industry, according to a summary of the bill.

Generally, the Craft Beverage Modernization and Tax Reform Bill of 2019 would implement the following provisions:

For Brewers:

Reduce excise taxes to provide more cash flow to reinvest in personal business growth.

Simplify rules for ingredient approval and brewery collaboration.

For Vintners:

Expand the wine producer tax credit.

Expand allowances for tax purposes on carbonation and alcohol content for certain wines.

For Distillers:

Establish reduced excise taxes for small craft distilleries.

Reduce restrictions on tax-free transfers of spirits between distillers.

The bill would also exempt beverage producers from certain capitalization rules for aged products.

"The craft beverage industry is driven by small businesses that support thousands of jobs and contribute billions in economic output," Blunt said in the press release.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

The IRS’s proposed 50-percent gross income locational rule on the active conduct of Opportunity Zone businesses is garnering criticism from stakeholders and lawmakers alike. The IRS released proposed regulations, NPRM REG-115420-18, for tax reform’s Opportunity Zone program last October.

50-Percent Locational Rule

Many stakeholders have urged the IRS to reconsider its proposed rule requiring that at least 50-percent of gross income of a Qualified Opportunity Zone (QOZ) business is derived from the active conduct of a trade or business within the QOZ. The IRS heard from several of these stakeholders at a full house public hearing on the proposed regulations held last week at IRS headquarters in Washington, D.C.

"[W]e’re concerned that manufacturing businesses, e-commerce enterprises, and others that have the potential to spur significant economic activity could be excluded inadvertently because of this rule," Stefan Pryor, Rhode Island Secretary of Commerce said at the hearing. Additionally, other stakeholders commented that the proposed rule would go against congressional intent.

Comment. There is no locational-related rule for gross income of QOZ businesses included in the law’s statutory language. However, the statutory language does provide a tangible property test to ensure qualifying businesses are predominantly located within the QOZ.

QOZ Business Congressional Intent

To that end, the bipartisan, bicameral tax writers who drafted the original QOZ bill language, too, have urged the IRS to remove the 50-percent gross income locational requirement.

The Opportunity Zone program was enacted under the Tax Cuts and Jobs Act ( P.L. 115-97) in 2017. The program is housed under new Code Secs. 1400Z-1 and 1400Z-2. Although not a single Democrat voted for the TCJA, the Opportunity Zone program was based on a bicameral measure sponsored by a group of bipartisan tax writers.

"Since many businesses derive income from the sale of goods and services outside of a single census tract, this would significantly limit the ability for local operating businesses to qualify for Opportunity Fund investment, contrary to congressional intent," the lawmakers wrote in a recent letter to Treasury Secretary Steven Mnuchin. "Even for those businesses who might qualify under this rule, it would impose immense new administrative burdens to track and report the location of each source of business income," they added.

Second Round of Proposed Regulations

Currently, the IRS is working on a second batch of proposed regulations for Opportunity Zones. Those proposed rules "hopefully will see the light of day shortly," Scott Dinwiddie, an IRS official in the Income Tax and Accounting division said at last week’s hearing.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

The IRS has said that it is postponing its plan to discontinue faxing taxpayer transcripts. The IRS statement came on the heels of a letter sent earlier this week from bipartisan leaders of the Senate Finance Committee urging such a delay.

IRS Cybersecurity

The IRS announced in IRS News Release IR-2018-256 last December that it would stop its tax transcript faxing service for individuals and businesses on February 4, 2019. The IRS cited to reasons of taxpayer security for the change in procedure. To that end, ceasing the IRS’s transcript faxing service would better prohibit cybercriminals from obtaining taxpayer data, according to the IRS.

Grassley, Wyden Urge Delay

SFC Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., sent IRS Commissioner Charles Rettig a letter earlier this week expressing concern with the IRS’s original timeline for discontinuing the tax transcript faxing service. The bipartisan leaders did not ask the IRS to eliminate its plan to discontinue the particular service. However, they did encourage the IRS to extend the date of discontinuation for the sake of taxpayers and practitioners in light of the recent partial government shutdown, which included the IRS.

"[W]e encourage the IRS to delay its planned discontinuation of faxing taxpayer information until such time that the agency can reasonably resolve the legitimate concerns of the tax-practitioner community about alternatives to the IRS faxing taxpayer information," Grassley and Wyden wrote. "Of course, such a delay should not compromise the security or privacy of taxpayer information."

IRS Extends Transcript Faxing Service

The IRS’s Wage & Investment Division issued a January 30 statement stating that the IRS will extend its transcript faxing service beyond February 4. Additionally, the IRS said it is reviewing options for a new timeline and will provide taxpayers and practitioners advance notice of the new date.

If you have completed your tax return and you owe more money that you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

If you have completed your tax return and you owe more money than you can afford to pay in full, do not worry, you have many options. While it is in your best interest to pay off as much of your tax liability as you can, there are many payment options you can utilize to help pay off your outstanding debt to Uncle Sam. This article discusses a few of your payment options.

Pay Uncle Sam as much as you can

First and foremost, if you cannot pay the full amount of taxes due, you should nevertheless file your return by the April 15 deadline. Moreover, you should send in as much money as you can with your return. The IRS assesses failure-to-file penalties so you should file your return despite being unable to pay the full amount with the return. As such, it's to your benefit to file your return by its due date and pay off any outstanding balance as soon as you can in order to minimize interest and penalties.

Payment options

If you are not able to pay the full amount of tax you owe, you have options. While you can obtain an automatic six-month extension of time to file, the IRS will still assess interest on the outstanding unpaid tax liability. To do so, you must file Form 4868, Application for Automatic Extension of Time To File U.S. Income Tax Return, by the due date for filing your calendar year return (typically April 15) or fiscal year return. However, an extension of time to file is not an extension of the time to pay your taxes. Penalties and interest continue to accrue during the extension.

Second, consider paying some or all of your tax liability by credit card or obtaining a cash advance on your credit card. The interest rate your credit card or bank charges (plus applicable fees) may be lower than the total amount of interest and penalties imposed by the IRS under the Tax Code.

You may also be eligible to take advantage of the IRS's monthly installment agreement option. This option allows eligible taxpayers to pay off their tax bill over a period of time - in monthly installments - to the IRS. However, if you have entered into an installment agreement during the preceding 5 years you cannot use this option. Additionally, even while you are making payments through an installment agreement, penalties and interest continue on the unpaid portion of that debt. To request an installment plan, you can use Form 9465, Request For Installment Agreement. Or, you can use the Online Payment Agreement (OPA) application.

There are many options for paying off your tax debt. Our office can discuss the payment options that will work best in your specific circumstances. Please don't hesitate to call our office with questions.

If you did not receive a full economic stimulus check in 2008 or your circumstances changed in such a way that you now qualify for the full payment, you may be entitled to receive a Recovery Rebate Credit (RRC). The RRC is a one-time tax credit allowed to be taken by qualifying individuals who received only a partial stimulus payment last year or no payment at all. The RRC is calculated in the same way as the 2008 economic stimulus payment except that your 2008 income tax information (as opposed to your 2007 tax information) is used to determine the amount of the RRC.

If you did not receive a full economic stimulus check in 2008 or your circumstances changed in such a way that you now qualify for the full payment, you may be entitled to receive a Recovery Rebate Credit (RRC). The RRC is a one-time tax credit allowed to be taken by qualifying individuals who received only a partial stimulus payment last year or no payment at all. The RRC is calculated in the same way as the 2008 economic stimulus payment except that your 2008 income tax information (as opposed to your 2007 tax information) is used to determine the amount of the RRC.

Who can claim the RRC?

You may be able to claim the RRC if:

You did not receive an economic stimulus payment at all in 2008;

Your financial situation has significantly changed since last year (for example, you lost your job, started a new job that pays less, or had children);

You received less than the maximum payment in 2008 ($600 for individuals and $1,200 for joint filers) because your 2007 gross income was either too high or too low;

You had an additional qualifying child in 2008;

You could be claimed as a dependent on someone else's tax return in 2007, but you cannot be claimed as a dependent on someone else's return in 2008; or

You did not have a valid Social Security number (SSN) in 2007 but you received one in 2008.

Amount

The RRC is worth up to $600 for individuals with an adjusted gross income (AGI) of up to $75,000 and $1,200 for couples filing joint returns with an AGI of up to $150,000. An additional credit is available of up to $300 per qualifying child. For taxpayers without children, the maximum payment is fully phased out at $87,000 (and at $174,000 for joint filers). Individuals with an AGI of more than $87,000 and joint filers with an AGI of more $174,000 are not eligible for the tax rebate.

Figuring the credit

The RRC is calculated in the same way as last year's economic stimulus payment, except that you will use your 2008 tax information to determine the credit amount. Any payment amount that you are now eligible for will not be issued as a separate payment, but will be included in any refund you receivefor the 2008 tax year. Your recovery rebate credit is reduced by any economic stimulus payment that you received in 2008. The RRC is claimed on Form 1040, 1040A, or 1040EZ. The RRC is refundable, which means that even those individuals who have income low enough that they are not required to file a 2008 return should file one to get the credit payment.

We can help determine if you qualify for the recovery rebate credit and if so, how much your credit will be. Please contact our office if you would like more information about the recovery rebate credit.

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) provides more than $75 billion worth of tax benefits for business for 2009 and 2010, in addition to numerous individual tax breaks. This article highlights some of the valuable tax breaks for businesses in the new law.

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) provides more than $75 billion worth of tax benefits for business for 2009 and 2010, in addition to numerous individual tax breaks. This article highlights some of the valuable tax breaks for businesses in the new law.

Bonus Depreciation. The ARRTA extends bonus depreciation under the 2008 Economic Stimulus Act, allowing businesses to immediately write-off an additional 50-percent of the cost of qualifying depreciable property placed in service before 2010. The additional 50-percent first-year bonus depreciation applies retroactively to capital expenses incurred on or after January 1, 2009. Qualified property includes most types of new property, including equipment, computers, tractors, wind turbines and solar panels.

The ARRTA also extends through 2010 additional first-year bonus depreciation for property with a recovery period of 10 years or longer, for transportation property (for example, tangible personal property used to transport people or property, and for certain aircraft).

Note.Effective January 1, 2009, the ARRTA law also increases the regular dollar caps for new passenger vehicles placed in service after 2008 and before 2010 by $8,000 when bonus depreciation is claimed.

Code Sec. 179 Expensing. For 2009, the ARRTA extends the Code Sec. 179 expensing amounts, which had been increased by the 2008 Economic Stimulus Act. For 2009, the Code Sec. 179 expensing amount is $250,000 and the investment ceiling is $800,000.

Five-Year NOL Carryback. The ARRTA allows certain small businesses to elect a five-year carryback of net operating losses (NOLs) arising in 2008. Only qualified small businesses with average gross receipts of $15 million or less qualify for the longer carryback. Eligible businesses can elect to carryback 2008 NOLs three, four or five years. The new carryback treatment applies only to NOLs arising in tax years beginning or ending in 2008. Quick refunds apply if your business qualifies.

AMT/R&D Credits Election. Through 2009, the ARRTA temporarily extends the ability of businesses to accelerate the recognition of a portion of their accumulated AMT and research and development (R&D) credits instead of taking bonus depreciation. In effect, this allows an immediate cash refund for these credits.

Work Opportunity Tax Credit. Businesses can claim a Work Opportunity Tax Credit (WOTC) generally equal to 40 percent of the first $6,000 of wages paid to employees who are in one of nine targeted groups. The ARRTA adds (1) unemployed veterans and (2) disconnected youth to the list of targeted groups. The new categories apply to individuals who are hired and begin work in 2009 or 2010.

Cancellation of Debt Income. Under the ARRTA, eligible businesses can make an (irrevocable) election to recognize certain cancellation of debt income (CODI) ratably over a five-year period, beginning in 2014. The election applies to certain types of business debt repurchased by the business during 2009 and 2010.

S Corp Built-In Gain Period. Current law provides that if a C corporation converts to an S corporation the conversion is not a taxable event. However, the S corporation usually must hold its assets for 10 years after the conversion in order to avoid being taxed on any built-in gains that existed at the time of the conversion. For S corp sales of their C corp assets in 2009 and 2010, however, the ARRTA temporarily shortens the holding period, from 10 to seven years, for sales of assets subject to the built-in gains tax imposed after such a conversion.

Qualified Small Business Stock. Pre-ARRTA law allowed noncorporate investors to exclude 50 percent of the gain from the sale of certain qualified small business stock (QSBS) held for more than five years. The ARRTA increases the exclusion to 75 percent for QSBS acquired after February 17, 2009 and before 2011. A "qualified small business" is one that does not have more than $50 million in assets and conducts an active trade or business.

Estimated Tax Payments. For individual taxpayers with income from small businesses, the ARRTA temporarily reduces 2009 required estimated tax payments for certain small businesses. Under the new law, 2009 quarterly estimated tax payments may now be based on 90 percent - instead of 100 percent - of the taxpayer's 2008 returns. For purposes of the new provision, a "small business" is one that does not employ more than an average of 500 people, and the individual's adjusted gross income is less than $500,000. The individual also must certify that at least 50 percent of the gross income shown on his or her return for the preceding tax year was income from a "small trade or business."

Energy Incentives. A number of the energy tax incentives in the ARRTA are targeted to businesses. The ARRTA:

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) is loaded with various tax incentives for individuals for 2009 and 2010. Among the individual tax breaks in the new law are incentives for homeownership, help for the unemployed and employed, as well as education assistance and tax breaks for taxpayers with children. This article provides an overview of the major individual tax incentives provided by the ARRTA.

Making Work Pay Credit. The Making Work Pay credit is a new but temporary refundable credit. Qualified taxpayers will either take the credit through a reduction in the amount of income tax withheld from their paycheck by allowing a credit against income tax in an amount equal to the lesser of 6.2 percent of the individual's earned income or $400 ($800 for married couples filing jointly), or in a lump sum when filing their income tax return for the tax year.

Note. Individuals who are self-employed may qualify for the credit as well, to the extent earnings from self-employment are taken into account in computing taxable income.

The credit applies retroactively to the start of 2009 and extends through 2010. Up to the maximum $400/$800 credit amount is allowed for each year. The credit begins to phase out for individuals with modified adjusted gross income (MAGI) exceeding $75,000 ($150,000 in the case of married couples filing jointly). The credit will be phased out at a rate of 2 percent above the MAGI limits.

$250 Economic Recovery Payment. The ARRTA also provides a one-time payment of $250 to individuals on a fixed income, including railroad retirement beneficiaries, Social Security recipients, disabled veterans, as well as retired government workers who are not eligible for Social Security benefits. The $250 payment will reduce the individual's otherwise allowable Making Work Pay credit to which they may be entitled. This payment will only be made in 2009, likely around mid-year.

New Car Deduction. Both itemizers and non-itemizers can take advantage of a new but temporary above-the-line deduction for state and local sales taxes or excise taxes paid on the purchase of a new (qualifying) motor vehicle. Both domestic and foreign vehicles qualify as well as motor homes, SUVs, light trucks and motorcycles weighing no more than 8,500 gross pounds.

The deduction is allowed in computing AMT, but is not available to taxpayers who elect to deduct state and local sales and use taxes in lieu of income taxes as an itemized deduction. The deduction begins to phase-out for taxpayers with adjusted gross income (AGI) exceeding $125,000 ($250,000 for joint filers). Additionally, deductible sales/excise taxes cannot exceed the portion of tax attributable to the first $49,500 of the purchase price.

Enhanced First-Time Homebuyer Tax Credit. The ARRTA raises the maximum amount of the first-time homebuyer tax credit to $8,000 (up from $7,500) and extends the credit through December 1, 2009. The ARRTA also completely eliminates any repayment requirement for purchases made after January 1, 2009 if the taxpayer does not sell or otherwise dispose of the property within 36 months from the date of purchase. However, if the taxpayer does dispose of the residence within this time, pre-ARRTA rules for recapture apply, requiring the homebuyer to repay any credit amount received to the government over 15 years in equal installments. Purchases on or after April 9, 2008 and before January 1, 2009 are still governed by the original first-time homebuyer tax credit rules enacted last year in the Housing and Economic Recovery Act of 2008.

Education Credit. The ARRTA temporarily enhances and expands the Hope education tax credit (renaming it the American Opportunity education tax credit) for 2009 and 2010. The credit is increased in amount, to a maximum of $2,500 per year and extended to all four years of college education. Additionally, the credit is subject to more generous phase-out levels of $80,000 of AGI for individuals and $160,000 for joint filers. For 2009 and 2010, up to 40 percent of the American Opportunity credit is refundable.

Qualified Tuition Programs ("529 plans"). Distributions from qualified tuition programs (also known as "529 plans") used to pay a beneficiary's qualified higher education expenses are tax-free. For 2009 and 2010, ARRTA allows beneficiaries to use distributions from QTPs to pay for computers, laptops and computer technology, including internet access.

Child Tax Credit. The ARRTA increases the refundable portion of the child tax credit for both 2009 and 2010. For 2009 and 2010, the child tax credit is refundable to the extent of 15 percent of the taxpayer's earned income in excess of $3,000.

Enhanced Earned Income Tax Credit. For 2009 and 2010, the ARRTA temporarily increases the Earned Income Tax Credit (EITC) for working families with three or more children. The new law (1) increases the credit to 45 percent of a family's first $12,570 of earned income for families with three or more children and (2) adjusts the start of the EITC phase-out range upwards by $1,880 for joint filers, regardless of the number of children.

AMT Patch. The ARRTA boosts alternative minimum tax (AMT) exemption amounts for 2009. The new amounts are slightly higher than last year's exemptions but much higher than the amounts they had been set to revert to had this remedial provision not been passed.

The 2009 exemption amounts are:

$46,700 for individuals and heads of household; and

$70,950 for joint filers and surviving spouses.

The new law also provides that for 2009 nonrefundable personal credits may offset both regular tax and the AMT.

Partial Exclusion of Unemployment Benefits. The ARRTA temporarily excludes up to $2,400 of unemployment compensation from a recipient's gross income for 2009. Unemployment benefits are otherwise includible in a recipient's gross income for tax purposes. As such, any unemployment benefits over $2,400 in 2009 will be subject to federal income tax.

Increased Transit Benefits For Workers. Beginning in March 2009, and effective for 2009 and 2010, the ARRTA increases the income exclusion for transit passes and van pooling to $230 per month.

Energy Incentives. Code Sec. 25C provides a tax credit for energy efficient improvements made to a taxpayer's home. The ARRTA increases the Code Sec. 25C residential energy property credit to 30 percent (up from 10 percent), raises the maximum cap to a $1,500 aggregate amount for 2009 and 2010 installations, eliminates the pre-2008 $500 lifetime cap, and makes other modifications to the credit. Taxpayers can use the credit for insulation materials, exterior windows and doors, skylights, central air conditioning, and hot water boilers, among many other energy efficient improvements.

The ARRTA also removes the individual dollar caps under the Code Sec. 25D residential energy efficient property credit for solar hot water property, wind energy property and geothermal heat pumps. Moreover, if you are interested in an environmentally-friendly car, the ARRTA modifies the credit for plug-in electric vehicles, although they are not yet on the market.

If you have any questions about the individual tax incentives in the ARRTA, please contact our office.

Even though gas prices have gone down from their record highs six-months ago, many people are looking for ways to save on their energy costs. The Tax Code provides a number of energy tax incentives to encourage individuals and businesses to invest in energy-efficient property and also in alternative sources of energy. One of those incentives is the Code Sec. 25C residential energy property tax credit for individuals.

Even though gas prices have gone down from their record highs six-months ago, many people are looking for ways to save on their energy costs. The Tax Code provides a number of energy tax incentives to encourage individuals and businesses to invest in energy-efficient property and also in alternative sources of energy. One of those incentives is the Code Sec. 25C residential energy property tax credit for individuals.

Improvements

If you make an eligible energy-related improvement to your home, the expenditure may qualify for the Code Sec. 25C credit. Eligible improvements include:

As you can see, the list of improvements is extensive. Moreover, the qualification of some types of improvements may not be readily apparent. For example, skylights and windows installed in a new location, not only replacement skylights and windows, appear to qualify for the credit. Another example is insulated garage door replacements, which qualify as exterior doors and, if sufficiently insulated, are an energy efficiency improvement.

ENERGY STAR

ENERGY STAR is a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy. Many products with the ENERGY STAR label qualify for the Code Sec. 25C credit. For example, ENERGY STAR labeled windows and skylights are eligible for the credit.

Residence

To qualify for the credit, the improvement must be installed on, or in connection with, a dwelling unit located in the U.S. that is owned and used by you as your principal residence. The Code Sec. 25C credit is only available for existing homes. It cannot be used for new homes (however, other tax incentives may apply to new homes).

Amount

First, you need to keep receipts of all your qualifying purchases. Second, if you made any qualifying purchases in 2005 or 2006, and you claimed some but not all of the credit, you can use the unused portion in 2009.

The Code Sec. 25C residential energy property credit is 10 percent of the amount paid up to certain maximums. The general lifetime maximum is $500 for qualifying improvements. There is a $200 maximum for qualifying windows. Taxpayers cannot carry forward the credit. Generally, the amount of the credit will be limited by the amount of any nonbusiness energy property credit taken in 2006 or 2007.

2009 only

You need to act soon to take advantage of the Code Sec. 25C tax credit. Last year, Congress reinstated the credit but only for qualified energy property placed in service in 2009. Unfortunately, if you installed qualifying property in 2008, you cannot claim the credit. The previous credit expired as to property placed in service after December 31, 2007.

If you are considering the purchase of energy improvement property in 2009, please contact our office. Don't miss out on this potentially valuable tax break. We can review the credit in more detail as it applies to your situation.

The term "luxury auto" for federal tax purposes is somewhat of a misnomer. The IRS's definition of "luxury auto" is likely not the same as your definition.

The term "luxury auto" for federal tax purposes is somewhat of a misnomer. The IRS's definition of "luxury auto" is likely not the same as your definition.

The IRS limits the amount of depreciation that may be claimed on a passenger automobile used for business. These limits are popularly referred to as the "luxury car rules." Taxpayers who use the IRS standard business mileage rate (which is 55 cents-per-mile in 2009) do not have to worry about the depreciation allowance because the cents-per-mile rate includes depreciation.

MACRS

Taxpayers who choose to take a depreciation deduction for their vehicles start with the regular depreciation tables under the Modified Adjusted Cost Recovery System (MACRS). The vehicle must be used 50 percent or more for business purposes. The cost of a vehicle is depreciated over six years. In Year 1, 20 percent is depreciable; 32 percent in Year 2; 19.2 percent in Year 3; 11.52 percent in Years 4 and 5; and 5.76 percent in Year 6.

Dollar limits

Under Code Sec. 280F, annual dollar limits apply to "luxury autos." The applicable set of annual dollar amount limits depends on the date on which the vehicle is placed in service. The dollar limits are adjusted for inflation annually.

The annual maximum depreciation amounts for passenger automobiles first placed in service in calendar year 2009 are:

$2,960 for the first tax year;

$4,800 for the second tax year;

$2,850 for the third tax year; and

$1,775 for each tax year thereafter.

Bonus depreciation

In 2008, Congress authorized bonus depreciation as part of the Economic Stimulus Act of 2008. Fifty percent bonus depreciation applied in 2008 to vehicles unless the taxpayer elected out of it. This resulted in higher dollar limits ($8,000 if bonus depreciation was claimed for a qualifying vehicle placed in service in 2008, for a maximum first-year depreciation of no more than $10,960 for autos). Congress may extend bonus depreciation into 2009.

If you are finally ready to part with those old gold coins, baseball cards, artwork, or jewelry your grandmother gave you, and want to sell the item, you may be wondering what the tax consequences will be on the disposition of the item (or items). This article explains some of the basic tax consequences of the sale of a collectible, such as that antique vase or gold coin collection.

If you are finally ready to part with those old gold coins, baseball cards, artwork, or jewelry your grandmother gave you, and want to sell the item, you may be wondering what the tax consequences will be on the disposition of the item (or items). This article explains some of the basic tax consequences of the sale of a collectible, such as that antique vase or gold coin collection.

Collectibles

You must pay tax on any gain you realize from the sale of a collectible item (or the entire collection), such as a gold watch or other jewelry, antique coins, artwork, figurines, and even baseball cards. Capital gains on collectibles are taxed at a rate of 28 percent, rather than the regular long-term capital gains rate, currently at 15 percent (zero for those in the 10 or 15 percent income tax brackets). Gain on collectibles is reported on Schedule D of Form 1040. To calculate capital gains on the sale or other disposition you need to determine what your basis in the item is.

If you purchased the item, your basis is generally what you paid for the item as well as certain expenses related to the purchase. Fees related to the sale itself should also be included, such as a broker's or auctioneer's fee or an appraisal or authentication fee.

If you inherited the item, then your basis is the item's fair market value (FMV) at the time you inherited it. There are two principal methods for determining FMV: an appraisal, such as used for estate purposes, or valuing the item based on contemporaneous sales of comparable items. However, this can be tricky because the condition of a collectible item plays significantly into its value.

If the item was a gift, then your basis is the same as the basis of the person who gave you the item.

If you buy and sell collectibles on a regular basis, devote a substantial amount of time and effort to the activity and have developed a degree of skill in identifying profitable transactions, you may be engaged in a trade or business. In this case, you may be engaged in a trade or business in the eyes of the IRS, and therefore your stock of collectibles may be "inventory" and your profits taxable as ordinary income.

Precious metals

Gold and silver, like stamps and coins, are treated by the IRS as capital assets except when they are held for sale by a dealer. Any gain or loss from their sale or exchange is generally a capital gain or loss. If you are a dealer, the amount received from the sale is ordinary business income. However, metals like gold and silver are classified by the Internal Revenue Code as collectibles, and gain recognized from the sale of gold or silver held for more than one year - whether or not in the form of jewelry or sold simply for its market content - is taxed at the maximum rate of 28 percent.

For all sales of more than $600, an information return generally must be filed with the IRS.

With the economic downturn taking its toll on almost all facets of everyday living, from employment to personal and business expenditures, your business may be losing money as well. As a result, your business may have a net operating loss (NOL). Although no business wants to suffer losses, there are tax benefits to having an NOL for tax purposes. Moreover, the American Recovery and Reinvestment Act of 2009 temporarily enhances certain NOL carryback rules.

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With the economic downturn taking its toll on almost all facets of everyday living, from employment to personal and business expenditures, your business may be losing money as well. As a result, your business may have a net operating loss (NOL). Although no business wants to suffer losses, there are tax benefits to having an NOL for tax purposes. Your business can use the NOL in future years to offset its taxable income. Your business can also use an NOL to offset income from the prior two years; in this type of "carryback" situation, it can mean an immediate tax refund to help with current operating expenses.

NOLs, generally

A trade or business has an NOL when its allowable deductions exceed its gross income for the tax year. A business can have an NOL whether it is a corporation, partnership or sole proprietorship. For example, NOLs can be generated if you operate a trade or business as a sole proprietorship that is taxed to the individual.

Note. The American Reinvestment and Recovery Act of 2009 (2009 Recovery Act) temporarily increases the carryback period to five years for small businesses (defined by the new law as businesses with average gross receipts of $15 million or less). These businesses can elect to carryback NOLs three, four or five years. However, this treatment applies only to NOLs beginning or ending in 2008. Businesses that qualify can apply for an immediate refund of taxes paid during the extended carryback period. Forms 1045, Application for Tentative Refund, and Form 1139, Corporate Application for Tentative Refund, must generally be filed within one year after the end of the tax year of the NOL.

Deductible expenses for computing NOLs

Generally, business deductions are those deductions related to a taxpayer's trade or business or employment. For this purpose, the following types of losses are considered business deductions that can be used to compute an NOL:

Losses from the sale or exchange of depreciable or real property used in the taxpayer's trade or business, including Code Sec. 1231 property;

Losses attributable to rental property;

Losses incurred from the sale of stock in a small business corporation or from the sale or exchange of stock in a small business investment company, to the extent that these types of losses qualify as ordinary losses;

Losses on the sale of accounts receivable (but only if the taxpayer uses the accrual method of accounting); and

Business losses from a partnership or S corporation.

In addition, the following expenses are considered business deductions for purposes of computing an NOL:

Personal casualty and theft losses and nonbusiness casualty and theft losses from a transaction entered into for profit;

Moving expenses;

State income tax on business profits;

Litigation expenses and interest on state and federal income taxes related to a taxpayer's business income;

The deductible portion of employee expenses, such as travel, transportation, uniforms, and union dues;

Payments by a federal employee to buy back sick leave used in an earlier year;

Unrecovered investment in a pension or annuity claimed on a decedent's final return; and

Deduction for one-half of the self-employment tax.

Carryback and carryforward rules

Generally, an NOL must be carried back and deducted against taxable income in the two tax years before the NOL year before it can be carried forward and applied against taxable income, up to 20 years after the NOL year. An NOL must be used in the earliest year available; however, you can waive the use of the carryback period and immediately carry the NOL forward. To claim an NOL carryback, an individual or a corporation must file an amended return within three years of the year the NOL was incurred.

Generally, the carryback and carryforward periods cannot be extended. Any NOL remaining after the 20-year carryforward period will be lost. However, you may be able to use an expiring NOL in the final year by accelerating the recognition of income.

Comment. There are certain exceptions to the two-year carryback period. The carryback period is three years for an NOL from a casualty or theft, and also three years for losses from a Presidentially-declared disaster affecting a small business or a farmer. A "farming loss" can be carried back five years and a 10-year period is available for product liability losses and environmental claims.

Partnerships and S corporations

If your business operates as a partnership or an S corporation, the NOL flows through to the partners or shareholders who can use the NOL to offset other business and personal income. The partnership or S corporation itself cannot use the NOL.

Note. Shareholders may not deduct a C corporation's NOLs. Moreover, because a corporation is a separate taxpayer, NOLs do not automatically flow between the corporation and another entity that takes over the corporation.

Individuals

Individuals may have an NOL not only from business losses but from other expenses, although this is less common. In addition to business losses, an individual includes in his or her NOL computation the following deductions:

Employee business expenses;

Casualty and theft;

Moving expenses for a job relocation; and

Expenses of rental property held for the production of income.

If you would like to discuss whether you have an NOL and how you might use it, please contact our office.

You have carefully considered the multitude of complex tax and financial factors, run the numbers, meet the eligibility requirements, and are ready to convert your traditional IRA to a Roth IRA. The question now remains, however, how do you convert your IRA?

You have carefully considered the multitude of complex tax and financial factors, run the numbers, meet the eligibility requirements, and are ready to convert your traditional IRA to a Roth IRA. The question now remains, however, how do you convert your IRA?

Conversion basics

A conversion is a penalty-free taxable transfer of amounts from a traditional IRA to a Roth IRA. You can convert part or all of the money in your regular IRA to a Roth. When you convert your traditional IRA to a Roth, you will have to pay income tax on the amount converted. However, a traditional IRA may be converted (or rolled over) penalty-free to a Roth IRA as long as you meet the requirements for conversion, including adjusted gross income (AGI) limits in effect until 2010. You should have funds outside the IRA to pay the income tax due on the conversion, rather than taking a withdrawal from your traditional IRA to pay for it - those withdrawals are subject to an early withdrawal penalty and they cannot be put back at a later time to continue to accumulate in the tax-free environment of an IRA.

Big news for 2010 and beyond

Beginning in 2010, you can convert from a traditional to a Roth IRA with no income level or filing status restrictions. For 2008, Roth IRAs are available for individuals with a maximum adjusted gross income of $116,000 ($169,000 for joint filers and heads of household). These income limits have prevented many individuals from establishing or converting to a Roth IRA. Not only is the income limitation eliminated after 2009, taxpayers who convert to a Roth IRA in 2010 can recognize the conversion amount in adjusted gross income (AGI) ratably over two years, in 2011 and 2012.

Example. You have $14,000 in a traditional IRA, which consists of deductible contributions and earnings. In 2010, you convert the entire amount to a Roth IRA. You do not take any distributions in 2010. As a result of the conversion, you have $14,000 in gross income. Unless you elect otherwise, $7,000 of the income is included in income in 2011 and $7,000 is included in income in 2012.

Conversion methods

There are three ways to convert your traditional IRA to a Roth. Generally, the conversion is treated as a rollover, regardless of the conversion method used. Any converted amount is treated as a distribution from the traditional IRA and a qualified rollover contribution to the Roth IRA, even if the conversion is accomplished by means of a trustee-to-trustee transfer or a transfer between IRAs of the same trustee.

1. Rollover conversion. Amounts distributed from a traditional IRA may be contributed (i.e. rolled over) to a Roth IRA within 60 days after the distribution.

2. Trustee-to-trustee transfer. Amounts in a traditional IRA may be transferred in a trustee-to-trustee transfer from the trustee of the traditional IRA to the trustee of the Roth IRA. The financial institution holding your traditional IRA assets will provide directions on how to transfer those assets to a Roth IRA that is maintained with another financial institution.

3. Internal conversions. Amounts in a traditional IRA may be transferred to a Roth IRA maintained by the same trustee. Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, in lieu of opening a new account or issuing a new contract. As with the trustee-to-trustee transfer, the financial institution holding the traditional IRA assets will provide instructions on how to transfer those assets to a Roth IRA. The transaction may be simpler in this instance because the transfer occurs within the same financial institution.

Failed conversions

A failed conversion has significant negative tax consequences, and generally occurs when you do not meet the Roth IRA eligibility or statutory requirements; for example, your AGI exceeds the limit in the year of conversion or you are married filing separately (note: as mentioned, the AGI limit for Roth IRAs will no longer be applicable beginning in 2010).

A failed conversion is treated as a distribution from your traditional IRA and an improper contribution to a Roth IRA. Not only will the amount of the distribution be subject to ordinary income tax in the year of the failed conversion, it will also be subject to the 10 percent early withdrawal penalty for individuals under age 59 1/2, (unless an exception applies). Moreover, the Tax Code imposes an additional 6 percent excise tax each year on the excess contribution amount made to a Roth IRA until the excess is withdrawn.

Caution - financial institutions make mistakes

The brokerage firm, bank, or other financial institution that will process your IRA to Roth IRA conversion can make mistakes, and their administrative errors will generally cost you. It is imperative that you understand the process, the paperwork, and what is required of you and your financial institution to ensure the conversion of your IRA properly and timely. Our office can apprise you of what to look out for and what to require of the financial institutions you will deal with during the process.

Determining whether to convert your traditional IRA to a Roth IRA can be a complicated decision to make, as it raises a host of tax and financial questions. Our office can help you determine not only whether conversion is right for you, but what method is best for you, too.

It is a common decision you may make every tax season: whether to take the standard deduction or itemize deductions. Most taxpayers have the choice of itemizing deductions or taking the applicable standard deduction amount, the choice resting on which figure will result in a higher deduction. Once you have determined the standard deduction amount that applies to you, the next step is calculating the amount of your allowable itemized deductions; not always a simple task.

It is a common decision you may make every tax season: whether to take the standard deduction or itemize deductions. Most taxpayers have the choice of itemizing deductions or taking the applicable standard deduction amount, the choice resting on which figure will result in a higher deduction. Once you have determined the standard deduction amount that applies to you, the next step is calculating the amount of your allowable itemized deductions; not always a simple task.

Standard deduction basics

Nearly two out of three taxpayers take the standard deduction rather than itemizing deductions, according to the IRS. Moreover, favorable changes to the tax laws made in 2008 may make the standard deduction even more attractive to non-itemizers. Not all taxpayers can take the standard deduction, however. For example, a married taxpayer filing a separate return whose spouse elects to itemize his or her deductions can not take the standard deduction that year. And those who are dependents of another cannot take the full standard deduction.

The standard deduction amounts have increased for 2009 as a result of inflation adjustments. Additionally, marriage penalty relief continues to allow joint filers to take double the deduction amount as single filers. However, this benefit for married couples sunsets for tax years after December 31, 2010, unless Congress acts to extend marriage penalty relief.

Standard property tax deduction for non-itemizers. Non-itemizers can also increase their standard deduction for 2009 by the lesser of (1) the amount otherwise allowable to the individual as a deduction for state and local property taxes, or (2) $500 ($1,000 in the case of married individuals filing jointly).

Additional deduction for age and blindness. Taxpayers who are age 65 or older or who are blind receive an additional standard deduction amount that is added to the basic standard deduction (above). The additional amounts for 2009 are $1,400 for single filers and head of household, and $1,100 each, for married individuals (filing jointly or separately) and surviving spouses. Two additional standard deduction amounts can be taken by a taxpayer who is both over 65 and blind.

Itemizing deductions

A significant consideration when deciding whether to itemize your deductions is that total itemized deductions will be reduced if your adjusted gross income (AGI) is too high. For 2009, the itemized deductions of higher-income taxpayers are reduced by the lesser of:

3 percent of a taxpayer's AGI over $166,800 ($83,400 for married taxpayers filing separately); or

80 percent of the amount of the itemized deductions subject to the reduction, which are otherwise allowable for the tax year.

Note. There is no required reduction for deductions of medical expenses, investment interest, and casualty, theft or wagering losses. You may want to take steps to decrease your AGI this year, such as by deferring income or accelerating the deductions to a low AGI year.

Some itemized deductions may only be claimed if they exceed a certain percentage of your AGI (2% for miscellaneous itemized deductions, 7.5% for medical expenses, and 10% for casualty losses). Any increase in your AGI will reduce AGI-based itemized deductions leaving you with fewer deductions to offset your total income.

Common itemized deductions you may want to consider are:

Medical expenses;

Charitable contributions;

Sales taxes (in lieu of state and local income taxes);

State and local income taxes;

State and local property taxes;

Mortgage interest on a principal and secondary residence;

Investment interest;

Personal casualty losses;

Gambling losses of a nonprofessional gambler not in excess of winnings; and

Planning tip. Those who are close to the cut off amount for being better off itemizing than taking the standard deduction might want to consider using a year-end planning technique that incorporates alternating between the standard deduction and itemizing deductions each year. The strategy is to accelerate or defer expenses that can boost itemized deductions all into a one year, then take the standard deduction for the other tax year.

Caution. To complicate matters, some deductions either are not permitted or are allowed only in a lower amount if you are subject to alternative minimum tax (AMT).

If you have questions about preparing your return, give our office a call. We can discuss your tax situation and help you navigate the complex maze of tax laws.

In a period of declining stock prices, tax benefits may not be foremost in your mind. Nevertheless, you may be able to salvage some benefits from the drop in values. Not only can you reduce your taxable income, but you may be able to move out of unfavorable investments and shift your portfolio to investments that you are more comfortable with.

In a period of declining stock prices, tax benefits may not be foremost in your mind. Nevertheless, you may be able to salvage some benefits from the drop in values. Not only can you reduce your taxable income, but you may be able to move out of unfavorable investments and shift your portfolio to investments that you are more comfortable with.

First, you should keep in mind that gain and loss on a sale of stock or mutual fund shares depends on the fair market value of the shares when sold or disposed of, compared to the cost basis of the stock. Your investments may have lost substantial value over recent periods. Nevertheless, if the stock's value when sold is higher than the basis, you still have a gain.

Example. You purchased X Corp stock in 2004, when it cost $5. At the end of 2007, the stock is worth $12. In November, 2008, you sell the stock when its value is $8 a share. Even though your investment has declined in value by 33 percent, you have a gain of $3 a share on the sale ($8 sales price less $5 cost).

The same tax-basis situation that may cause capital gain on the sale of shares that have dropped significantly in value over the past year also is causing many owners of mutual funds that have declined in value to be surprised with a capital gains distribution notice from their fund managers. If you own the mutual fund shares at the time of the capital gain distribution date, you must recognize the gain. Of course, that gain may be netted against your losses from stock or other capital asset sales.

If you realize a profit on a stock sale, the long-term capital gains tax is a maximum of 15 percent, while taxes on wages and other ordinary income can be taxed as high as 35 percent. For taxpayers in the 10 or 15 percent rate brackets, there is no capital gains tax. These reduced capital gains rates are scheduled to expire after 2010. Short-term capital gains (investments held for one year or less) are taxed at ordinary income rates up to 35 percent.

Capital losses can offset capital gains and ordinary income dollar for dollar. Capital gains can be offset in full, whether short-term or long-term. Ordinary income can be offset up to $3,000. If net capital losses (capital losses minus capital gains) exceed $3,000, the excess can be carried forward without limit and can offset capital gains and $3,000 of ordinary income in each subsequent year.

Because a capital loss can offset income taxed at the 35 percent rate, it can be advantageous to sell stock that yields capital gains in one year, while delaying the realization of capital losses until the following year.

Example. Mary has two assets. One asset would yield a $6,000 long-term capital loss when sold. The other would yield a $6,000 long-term capital gain. If Mary sells both assets in the same year, she has a net capital gain of zero. If she realizes the gain in 2008 and the loss in 2009 (by selling the assets in different years), she will increase her 2008 taxes by a maximum of $900 ($6,000 X 15 percent), but will reduce her taxes in 2009 and 2010 by a maximum of $2,100 ($3,000 X 35 percent X 2 years). She will reduce her taxes by $1,200 merely by shifting the timing of the sales.

Worthless securities. You can write off the cost of totally worthless securities as a capital loss, but cannot take a deduction for securities that have lost most of their value from stock market fluctuations or other causes if you still own them and they still have a recognizable value. You do not have to sell, abandon or dispose of the security to take a worthless stock deduction, but worthlessness must be evidenced by an identifiable event. An event includes cessation of the corporation's business, commencement of liquidation, actual foreclosure and bankruptcy. Securities become worthless if the corporation becomes worthless, even if the corporation has not dissolved, liquidated or ceased doing business.

If you would like to discuss these issues, please contact our office. We can help you consider your options.

The high cost of energy has nearly everyone looking for ways to conserve and save money, especially with colder weather coming to many parts of the country. One surprising place to find help is in the financial markets rescue package (the Emergency Economic Stabilization Act of 2008) recently passed by Congress. Overshadowed by the financial provisions are some very important energy tax incentives that could save you money at home and in your business.

The high cost of energy has nearly everyone looking for ways to conserve and save money, especially with colder weather coming to many parts of the country. One surprising place to find help is in the financial markets rescue package (the Emergency Economic Stabilization Act of 2008) recently passed by Congress. Overshadowed by the financial provisions are some very important energy tax incentives that could save you money at home and in your business.

While the energy tax incentives in the new law are generous, they are also complex. The names of the tax credits and deductions themselves can be daunting. Don't be put off by all the complex rules. Our office can help you navigate them and take advantage of their benefits.

Individuals

Improvements. If you are thinking of installing insulation or new energy-efficient windows and doors, you may be eligible for the residential energy property credit. This credit (also known as the Code Sec. 25C credit) gives eligible taxpayers a lifetime credit of up to $500 for making energy-efficient improvements to their residences. Up to $200 of the credit can be taken for the cost of windows. Besides insulation and energy-efficient windows and doors, some electric heat pump water heaters, natural gas, propane and oil furnaces, and other items qualify. The credit limits and energy-efficiency ratings are very complex so please contact our office before you make a purchase. We don't want you to miss out on a potentially valuable tax break. However, because of a quirk in the new law, the residential energy property credit is not available for 2008. However, you can take advantage of it in 2009.

Alternative energy. This credit (also known as the Code Sec. 25D credit) sounds a lot like the credit for energy efficient property but it is different. The key word in the title of the credit is "alternative." This credit rewards individuals who install certain types of alternative energy systems in their homes, particularly systems that utilize solar power and wind energy. These include solar electric, solar water heating, small wind energy, and geothermal heat pump property. Generally you must install the property before the end of 2016.

Businesses

Solar and wind power. Businesses are also eligible for some valuable energy tax breaks. Businesses that install solar energy and small wind energy property can take advantage of special tax credits that can reach as high as 30 percent. Generally, the solar or wind energy property must be used to generate electricity that heats, cools or lights a building.

Improvements. There is also a special tax deduction for energy efficient improvements made to commercial buildings. Generally, the improvements to heating, cooling, ventilation, lighting, and other qualifying systems must significantly reduce annual energy costs. Many of the new heating, cooling and lighting systems currently on the market meet these standards. If you recently installed new heating, cooling or lighting systems, you may have qualified for a tax break without even knowing it.

Manufacturers and builders.Manufacturers of energy efficient appliances, such as washing machines and refrigerators, are eligible for special tax credits. Additionally, contractors that build energy efficient homes can take advantage of tax breaks.

Transportation

In the not too distant future, you may be able to purchase a plug-in electric vehicle. In anticipation of that day, Congress created a new plug-in electric vehicle tax credit. The credit is available to everyone: individuals and businesses. Electric plug-in vehicles could be on the market as soon as 2010 so keep this tax break in mind if you shop for one.

These are just the highlights of some of the many energy tax incentives in the new law. Please contact our office for more details.

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

Nonbusiness creditors may deduct bad debts when they become totally worthless (i.e. there is no chance of its repayment). The proper year for the deduction can generally be established by showing that an insolvent debtor has not timely serviced a debt and has either refused to pay any part of the debt in the future, gone through bankruptcy, or disappeared. Thus, if you have loaned money to a friend or family member that you are unable to collect, you may have a bad debt that is deductible on your personal income tax return.

The fact that the debtor is a family member or other related interest does not preclude you from taking a bad debt deduction, provided that the debt was bona fide and that worthlessness has been established. A direct or indirect transfer of money between family members may create a bona fide debt eligible for the bad debt deduction. However, these transactions are closely scrutinized to determine whether the transfer is a bona fide debt or a gift.

Bona-fide debt and other requirements for deductibility

You may only take a bad debt deduction for bona-fide debts. A bona-fide debt is a debt arising from a debtor-creditor relationship based on a valid and enforceable obligation to repay a fixed or determinable sum of money. You must also have the present intention to seek repayment of the debt. Additionally, for a bad debt you must also show that you had the intent to make a loan, and not a gift, at the time the money was transferred. Thus, there must be a true creditor-debtor relationship.

Moreover, nonbusiness bad debts are only deductible in the year they become totally worthless (partially worthless nonbusiness bad debts are not deductible).

To deduct a bad debt, you must also have a basis in it, which means that you must have already included the amount in your income or loaned out your cash (for example, if your spouse has not paid court-ordered child support, you can not claim a bad debt deduction for the amount owed as this amount was not previously included in your gross income).

Reporting bad debts

You can deduct nonbusiness bad debts as short-term capital losses on Schedule D of your Form 1040. On Schedule D, Part I, Line 1, enter the debtor's name and "statement attached" in column (a). Enter the amount of the bad debt in parentheses in column (f). If you are reporting multiple bad debts, use a separate line for each bad debt. For each bad debt, attach a statement to your return containing the following:

A description of the debt, including the amount and date it became due;

The name of the debtor, and any business or family relationship between you and the debtor:

The efforts you made to collect the debt; and

An explanation of why you decided the debt was worthless (for example, you can show the debtor has declared bankruptcy or is insolvent, or that collection efforts such as through legal action will not likely result in the debt being paid).

If you did not deduct a bad debt on your original income tax return for the year it became worthless, you can file a refund claim or a claim for a credit due to the bad debt. You must use Form 1040X to amend your return for the year the debt became worthless. It must be filed with 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later.

Note. If you deduct a bad debt and in a later year collect all or part of the money owed, you may have to include this amount in your gross income. However, you can exclude from your gross income the amount recovered up to the amount of the deduction that did not reduce your tax in the year you deducted the debt.

With the U.S. and world financial markets in turmoil, many individual investors may be watching the value of their stock seesaw, or have seen it plummet in value. If the value of your shares are trading at very low prices, or have no value at all, you may be wondering if you can claim a worthless securities deduction for the stock on your 2008 tax return.

With the U.S. and world financial markets in turmoil, many individual investors may be watching the value of their stock seesaw, or have seen it plummet in value. If the value of your shares are trading at very low prices, or have no value at all, you may be wondering if you can claim a worthless securities deduction for the stock on your 2008 tax return.

Capital or ordinary loss treatment

When stock you own in a corporation becomes totally worthless during the tax year, you may be able to report a loss in the stock equal to its tax basis. Generally, a worthless stock loss is characterized as a capital loss because securities like stock that become worthless are usually treated as capital assets. When a security that is not a capital asset becomes wholly worthless, the loss is deductible as an ordinary loss. For example, if worthless stock is Code Sec. 1244 stock, ordinary loss treatment applies. Worthless stock is treated as if it was sold on the last day of the tax year.

Note. You may only deduct a loss on worthless securities if the loss is incurred in a trade or business, in a transaction entered into for profit, or as the result of a fire, storm, shipwreck, another casualty, or theft. It is generally assumed that an individual acquires securities for profit (although this assumption may be refuted).

Your stock is trading at $1.08 a share: Is it "worthlessness?"

A worthless stock deduction may only be taken when your securities have become totally worthless. You can not take the deduction for stock that has become only partially worthless. The Internal Revenue Code, however, does not define "worthlessness." Nonetheless, in the IRS's eyes, a company's stock is not going to be automatically considered worthless simply because the stock or security has plummeted in value and is now trading at mere dollars and cents.

With the current market turmoil, many stocks have taken big hits and dropped significantly in value, perhaps even trading for a $1.08 per share, but are nonetheless still alive and trading on an exchange. Therefore, you can not take a worthless stock deduction for a mere decline in value of stock caused by a fluctuation in market price or other similar cause, no matter how steep the decline, if your stock has any recognizable value on the date you claim as the date of loss. Even if a company in which you have stock files for bankruptcy, or lawsuits are filed against it, does not automatically qualify the stock or securities as worthlessness.

More hurdles to overcome

Even if you can establish that the stock you own has become totally worthless, the loss must be (1) evidenced by a closed and completed transaction, (2) fixed by identifiable events and (3) actually sustained during the tax year. First, you may only claim the deduction on your return for the tax year in which the stock has become completely worthless, and you must be able to show that the year in which you are claiming the loss is the appropriate tax year.

Generally, a worthless stock loss deduction can be taken in the year in which you abandon the stock. To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for the security. But, whether the transaction qualifies as abandonment, and not an actual sale or exchange, is a facts and circumstances test.

If you would like to know whether the stock or other securities you own have become worthless, please contact our office. We can help you navigate these complex rules.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

When you receive cash other than the like-kind property in a like-kind exchange, the cash is treated as "boot." Boot does not render the transaction ineligible for non-recognition treatment but it does require you to recognize gain to the extent of the cash received. The same is true for other non-like-kind property. In other words, anything you receive in addition to the like-kind property, such as relief from debt from a mortgage or additional property that is not like-kind will force you to recognize the gain realized.

An illustration

An example helps to show the gain computation and basis adjustments in a like-kind exchange where boot is received:

You want to transfer land with an adjusted basis of $70,000 and a fair market value of $100,000 in a like-kind exchange. As replacement property you will receive land from Charlie that is like-kind to the one you will transfer. However, Charlie's land has a fair market value of only $80,000. To equalize the value of the like-kind properties being exchanged, Charlie will give you $20,000 in cash. Because the $20,000 is not like-kind property, the like-kind exchange rules treat it as boot and you will have to recognize gain to that extent. Your computation will be as follows:

However, because you will receive only $20,000 of cash (boot), you will recognize only $20,000 of the gain realized. The rest of the gain or $10,000 will be preserved for a future date when the acquired property is recognized in a taxable transaction.

Basis adjustment. Gain that is not recognized when cash is present in a like-kind exchange will be "preserved" by adjusting your basis in the new property to reflect the remaining gain. The basis rules achieve the gain preservation by first allocating the gain realized to boot to the extent of its fair market value, then to the like-kind property in proportion to its relative fair market value.

The basis of the acquired property will be the adjusted basis of the property transferred, increased by recognized gain and decreased by loss recognized or money received in the exchange. In the above example, your adjusted basis in the replacement property will be $70,000. Because the fair market value of the replacement property is $80,000, the $10,000 of realized but unrecognized gain will be preserved in your adjusted basis.

Cash in excess of gain. In addition, if the fair market value of boot received exceeds the gain realized, only this amount of realized gain is recognized.

If, in our example, your adjusted basis were $90,000, your realized gain would only be $10,000 ($100,000 amount realized minus $90,000 adjusted basis). In that case, your recognized gain would be limited to $10,000 even though you received $20,000 in cash.

The new Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law in May, makes some important changes to offers-in-compromise (OIC). The new rules now require taxpayers to make nonrefundable partial payments with a submission of any OIC made on or after July 16, 2006. Taxpayers should be aware of the new requirements as the IRS is known for granting few OICs. Not complying with the new rules will likely increase the chances that the IRS will reject your offer.

The new Tax Increase Prevention and Reconciliation Act (TIPRA), signed into law in May, makes some important changes to offers-in-compromise (OIC). The new rules now require taxpayers to make nonrefundable partial payments with a submission of any OIC made on or after July 16, 2006. Taxpayers should be aware of the new requirements as the IRS is known for granting few OICs. Not complying with the new rules will likely increase the chances that the IRS will reject your offer.

Often a measure of last resort

OICs are often a measure of last resort to be used by taxpayers who are unable to pay tax liabilities in lump sums or through installment agreements. OICs must be in the best interest of the government and the taxpayer and must promote voluntary compliance with future payment and filing requirements.

In general, there are several requirements to file a valid OIC. These are:

Submit a $150 application fee, or Form 656-A, "Income Certification for Offer in Compromise Application Fee";

File all required tax returns;

File and pay any required employment tax returns on a timely basis for the two quarters prior to filing the OIC and must be current with the deposits for the quarter in which the OIC is submitted; and

Must not be a debtor in bankruptcy.

How much money is included?

In addition to the $150 nonrefundable application fee, taxpayers must now include partial payments with their OICs. Taxpayers submitting OICs offering to make a lump-sum payment must include a payment of 20 percent of the amount offered.

Taxpayers who submit OICs offering to make periodic payments must include the first payment with the OIC. They must continue making payments as proposed in the OIC while the OIC is being considered by the IRS.

The partial payments as well as the application fee are nonrefundable but are applied towards the taxpayer's liability. Also, in situations where taxpayers have more than one liability, they may decide towards which liability they want the payments to apply.

Non-compliant OICs

If taxpayers do not include the required payments with their OICs, the IRS will return the OICs as "unprocessable". In addition, taxpayers offering a periodic payment OIC will be deemed to have withdrawn their offers if they don't submit their periodic payments under the terms of their offers.

Other changes

The new tax law deems as accepted any OIC that has been submitted to the IRS but has not been rejected in 24 months. This period does not include time periods when the liability is in question in a judicial proceeding.

Since the IRS is known for taking a long time to review OICs, this may speed up the process. Although a more speedy evaluation period seems like a pro-taxpayer provision, some commentators have said that it may lead the IRS to reject offers when it has not had enough time to fully evaluate them

Contact our office if you have any questions about the new rules for OICs. Although the IRS has historically been very reluctant to grant an OIC, there are times when an OIC is the best course of action and the IRS recognizes this.

Three years ago, Congress enhanced small business expensing to encourage businesses to purchase equipment and other assets and help lift the economy out of a slow-down. This valuable tax break was set to expire after 2007. Congress has now extended it two more years as part of the recently enacted Tax Increase Prevention and Reconciliation Act. Taxpayers who fully qualify for the expensing deduction get what amounts to a significant up-front reduction in the out-of-pocket cost of business equipment.

Three years ago, Congress enhanced small business expensing to encourage businesses to purchase equipment and other assets and help lift the economy out of a slow-down. This valuable tax break was set to expire after 2007. Congress has now extended it two more years as part of the recently enacted Tax Increase Prevention and Reconciliation Act. Taxpayers who fully qualify for the expensing deduction get what amounts to a significant up-front reduction in the out-of-pocket cost of business equipment.

Indexed for inflation

In lieu of depreciation, taxpayers can elect to deduct up to $100,000 of the cost of qualifying property placed in service for the tax year. The $100,000 amount is reduced, but not below zero, by the amount by which the cost of the qualifying property exceeds $400,000.

The $100,000 and $400,000 limitations are indexed for inflation. For 2006, they are $108,000 and $430,000 respectively.

Expensing election

If you want to take advantage of the small business expensing election, you must do so on your original tax return, on Form 4562 (Depreciation and Amortization) or on an amended return filed before the due date for your original return including any extensions. If you don't claim it, you cannot change your mind later by filing an amended tax return after the due date.

Tangible personal property

The property that you purchase must be tangible personal property that is actively used in your business and for which a depreciation deduction would be allowed. The property must be newly purchased new or used property rather than property that you previously owned but recently converted to business use. If you have any questions about the type of property you are purchasing, give our office a call and we'll help you determine if it qualifies for enhanced expensing.

Generally, land improvements, such as buildings, paved parking lots and fences do not qualify for expensing. However, property contained in or attached to a building that is not a structural component, such as refrigerators, testing equipment and signs, does qualify.

Property acquired by gift or inheritance does not qualify. Property you acquired from related persons, such as your spouse, child, parent, or other ancestor, or another business with common ownership also does not qualify.

There are special provisions for applying the expensing rules to partnerships and S corporations, controlled groups of corporations, married couples, and sport utility vehicles. We can explain these provisions in more detail if you call our office.

Recapture

Qualifying property must be used more than 50 percent for business. If use falls below 50 percent, you may have to recapture (give back) part of the tax benefit you previously claimed.

The two-year extension opens the door to some important strategic tax planning opportunities. Our office can help you plan purchases so you get the maximum tax benefit. Give us a call today.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

Starting in 2010, the $100,000 adjusted gross income cap for converting a traditional IRA into a Roth IRA is eliminated. All other rules continue to apply, which means that the amount converted to a Roth IRA still will be taxed as income at the individual's marginal tax rate. One exception for 2010 only: you will have a choice of recognizing the conversion income in 2010 or averaging it over 2011 and 2012.

The Tax Increase Prevention and Reconciliation Act of 2005 eliminated the $100,000 adjusted gross income (AGI) ceiling for converting a traditional IRA into a Roth IRA. While this provision does not apply until 2010, now may be a good time to make plans to maximize this opportunity.

The Roth IRA has benefits that are especially useful to high-income taxpayers, yet as a group they have been denied those advantages up until now. Currently, you are allowed to convert a traditional IRA to a Roth IRA only if your AGI does not exceed $100,000. A married taxpayer filing a separate return is prohibited from making a conversion. The amount converted is treated as distributed from the traditional IRA and, as a consequence, is included in the taxpayer's income, but the 10-percent additional tax for early withdrawals does not apply.

Significant benefits

While recognizing income sooner rather than later is usually not smart tax planning, in the case of this new opportunity to convert a traditional IRA to a Roth IRA, the math encourages it. The difference is twofold:

All future earnings on the account are tax free; and

The account can continue to grow tax free longer than a traditional IRA without being forced to be distributed gradually after reaching age 70 ½.

These can work out to be huge advantages, especially valuable to individuals with a degree of accumulated wealth who probably won't need the money in the Roth IRA account to live on during retirement.

Example. Mary's AGI in 2010 is $200,000 and she has traditional IRA balances that will have grown to $300,000. Assuming a marginal federal and local income tax of about 40 percent on the $300,000 balance, the $180,000 remaining in the account can grow tax free thereafter, with distributions tax free. Further assume that Mary is 45 years of age with a 90 year life expectancy and money conservatively doubles every 15 years. She will die with an account of $1.44 million, income tax free to her heirs. If the Roth IRA is bequeathed to someone in a younger generation with a long life expectancy, even factoring in eventual required minimum distributions, the amount that can continue to accumulate tax free in the Roth IRA can be staggering, eventually likely to reach over $10 million.

Planning strategies

Now is not too early to start planning to take advantage of the Roth IRA conversion opportunity starting in 2010. While planning to maximize the conversion will become more detailed as 2010 approaches and your assets and income for that year are more measurable, there are certain steps you can start taking now to maximize your savings.

Start a nondeductible IRA

The income limits on both kinds of IRAs have prevented higher income taxpayers from making deductible contributions to traditional IRAs or any contributions to Roth IRAs. They could always make nondeductible contributions to a traditional IRA, but such contributions have a limited pay-off (no current deduction, tax on account income is deferred rather than eliminated, required minimum distributions).

While a taxpayer could avoid these problems by making nondeductible contributions to a traditional IRA and then converting it to a Roth IRA, this option was not available for upper income taxpayers who would have the most to benefit from such a conversion. With the elimination of the income limit for tax years after December 31, 2009, higher income taxpayers can begin now to make nondeductible contributions to a traditional IRA and then convert them to a Roth IRA in 2010. In all likelihood, there will be little to tax on the converted amount.

What's more, taxpayers with $100,000-plus AGIs should consider continue making nondeductible IRA contributions in the future and roll them over into a Roth IRA periodically. As a result, the elimination of the income limit for converting to a Roth IRA also effectively eliminates the income limit for contributing to a Roth IRA.

Example. John and Mary are a married couple with $300,000 in income. They are not eligible to contribute to a Roth IRA because their AGI exceeds the $160,000 Roth IRA eligibility limit. Beginning in 2006, the couple makes the maximum allowed nondeductible IRA contribution ($8,000 in 2006 and 2007, and $10,000 in 2008, 2009, and 2010). In 2010, their account is worth $60,000, with $46,000 of that amount representing nondeductible contributions that are not taxed upon conversion. The couple rolls over the $60,000 in their traditional IRA into a Roth IRA. They must include $14,000 in income (the amount representing their deductible contributions), which they can recognize either in 2010, or ratably in 2011 and 2012.

Assuming they have sufficient earned income each year thereafter (until reaching age 70 1/2), John and Mary can continue to make the maximum nondeductible contributions to a traditional IRA and quickly roll over these funds into their Roth IRA, thereby avoiding significant taxable growth in the assets that would have to be recognized upon distribution from a traditional IRA.

Rollover 401(k) accounts

Contributions to a Section 401(k) plans cannot be rolled over directly into a Roth IRA. The lifting of the $100,000 AGI limit does not change this rule. However, they often can be rolled over into a traditional IRA and then, after 2009, converted into a Roth IRA.

Not everyone can just pull his or her balance out of a 401(k) plan. A plan amendment must permit it or, more likely, those who are changing jobs or are otherwise leaving employment can choose to roll over the balance into an IRA rather than elect to continue to have it managed in the 401(k) plan.

For money now being contributed to 401(k) plans by employees, an even better option would be for those contributions to be made to a Roth 401(k) plan. Starting in 2006, as long as the employer plan allows for it, Roth 401(k) accounts may receive employee contributions.

Gather those old IRA accounts

Many taxpayers opened IRA accounts when they were first starting out in the work world and their incomes were low enough to contribute. Over the years, many have seen those account balances grow. These accounts now may be converted into Roth IRAs starting in 2010, regardless of income.

Paying the tax

In spite of all the advantages of a Roth IRA, a conversion is advisable only if the taxpayer can readily pay the tax generated in the year of the conversion. If the tax is paid out of a distribution from the converted IRA, that amount is also taxed; and if the distribution counts as an early withdrawal, it is also subject to an additional 10-percent penalty. For those planning to convert who may not already have the funds available, saving now in a regular bank or brokerage account to cover the amount of the tax in 2010 can return an unusually high yield if it enables a Roth IRA conversion in 2010 that might not otherwise take place.

Careful planning is key

Transferring funds between retirement accounts can carry a high price tag if it is done incorrectly. For those who plan carefully, however, converting from a traditional IRA to a Roth IRA can yield very substantial after-tax rates of return. Please feel free to call our offices if you have any questions about how the 2010 conversion opportunity should fit into your overall tax and wealth-building strategy.

No. Generally, payments that qualify as alimony are included in the recipient's gross income and are deducted from the payor's gross income. However, not all payments between spouses qualify as alimony.

No. Generally, payments that qualify as alimony are included in the recipient's gross income and are deducted from the payor's gross income. However, not all payments between spouses qualify as alimony.

Divorce or separation agreement

Payments do not qualify as alimony unless they are made under a written divorce or separation instrument. Any payment that exceeds the amount provided in the agreement, that is made before they are required by the agreement or that is made after they are no longer required by an agreement will not be considered alimony and will not be deductible as such.

The current rules apply to payments made under a post-1984 divorce or separation agreement. Covered under these rules are divorce or separation agreements executed after December 31, 1984, instruments executed before 1985 if a decree executed after December 31, 1984 changes the terms of the pre-1985 instrument, or pre-1985 instruments which are not treated as executed after December 31, 1984 but which have been modified after that date to expressly provide that the post-1984 rules are to apply.

Under the current rules, a divorce or separation agreement is defined as a divorce or separate maintenance decree or a written instrument incident to that decree, a written separation agreement, or a decree that is not a divorce decree or a separate maintenance decree but that requires a spouse to make payments for the support or maintenance of the other spouse.

Strict requirements

To be deductible, alimony payments must meet all the strict statutory requirements. First, the payment must be in cash or an equivalent and must be received by or on behalf of a spouse under a divorce or separation agreement.

Additionally, the agreement must not designate the payment as not includable in gross income and not allowable as a deduction under Code Sec. 215, the spouses who are legally separated under a decree of divorce or separate maintenance cannot be members of the same household when the payment is made, there must be no liability to make any payment after the death of the payee spouse, and spouses must not file joint returns with each other.

Lastly, the payment must not be fixed as child support. Payments that do not meet these requirements will not be considered alimony and cannot be deducted.

Different rules apply to payments made under pre-1985 divorce or separation agreements. However, a pre-1985 agreement can be expressly modified to provide that the rules for post-1984 agreements will apply to subsequent payments.

Ordinarily, you can deduct the fair market value (FMV) of property contributed to charity. The FMV is the price in an arm's-length transaction between a willing buyer and seller. If the property's value is less than the price you paid for it, your deduction is limited to FMV. In some cases, you must submit an appraisal with your tax return.

Ordinarily, you can deduct the fair market value (FMV) of property contributed to charity. The FMV is the price in an arm's-length transaction between a willing buyer and seller. If the property's value is less than the price you paid for it, your deduction is limited to FMV. In some cases, you must submit an appraisal with your tax return.

Record-keeping requirements vary for noncash contributions, depending on the amount of the deduction. Similar items should be combined to determine the amount of the contribution:

If the claimed deduction is less than $250, the charitable recipient must give you a receipt that identifies the recipient, the date of the contribution, and provides a detailed description of the property. You should keep a written record with a description of the property, its FMV, and how you determined the FMV, including a copy of any appraisals.

If the property's value is between $250 and $500, the requirements are similar. In addition, the recipient must give you a written acknowledgment that describes and values any goods or services provided to you.

If the value is between $500 and $5,000, your records must describe how the property was obtained, the date it was obtained or created, and the basis of the property.

If the value is between $5,000 and $500,000, you must obtain a qualified appraisal by a qualified appraiser, retain that appraisal in your records, and attach to your income tax return a completed Form 8283, Section B.

If you donate property and claim a deduction of more than $500,000, or donated art and deducted $20,000 or more, you must submit a "qualified appraisal" with your tax return.

Reporting requirements

If total noncash contributions exceed $500, you must fill out Section A of Form 8283, Noncash Charitable Contributions. If the contributions exceed $5,000, you must fill out Section B of the form. Publicly-traded securities must be listed on Section A, even if the value exceeds $5,000.

Form 8283 indicates that an appraisal generally must be submitted for amounts described in Section B. The IRS will deny the deduction if there is no appraisal, unless the failure to get an appraisal was due to reasonable cause and not willful neglect. If the IRS asks you to file Form 8283, the taxpayer will have 90 days to submit a completed form.

For property over $5,000, the appraiser and the charitable recipient must sign Form 8283. The form advises the recipient to file Form 8282, Donee Information Return, with the IRS and to give a copy to the donor if the property is sold within two years. This is not required if the item (or group of similar items) has a value of $500 or less, or if the property is transferred for a charitable purpose.

Qualified appraisal

You must obtain a "qualified appraisal" no earlier than 60 days before you contributed the property and before the due date of your return, including extensions. If you first report the contribution on an amended return, you must obtain an appraisal before you filed the amended return.

The appraisal must describe the property in detail so that it can be identified; give its condition; provide the date of contribution; describe any restrictions on the use of the property; and identify the appraiser. The appraisal also must provide the appraiser's qualifications; the date the property was valued; the FMV on the date of contribution; and the valuation method for determining value, including any comparable sales used.

A separate appraisal and a separate Form 8283 are required for each item or group of similar items. Only one appraisal is required for a group of similar items contributed in the same year. If similar items are contributed to more than one recipient and the items' value exceeds $5,000, a separate Form 8283 must be filed for each recipient.

Here's an example:

You donate $2,000 of books to College A, $2,500 of books to College B, and $1,000 of books to a public library. A separate Form 8283 must be submitted for each recipient.

Generally, a family member or a party who sold the property to the donor cannot be the appraiser. An appraiser who is regularly used by the donor or recipient must have performed the majority of his or her appraisals for other persons. Form 8283 requires that the appraiser either publicize his (or her) services or else perform appraisals on a regular basis. The appraisal fee cannot be based on a percentage of the appraised property value or of the deduction allowed by the IRS.

Fees that you pay for an appraisal are a miscellaneous itemized deduction and cannot be included in the charitable deduction.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.

Home sale exclusion

Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.

To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.

Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.

Unforeseen circumstances safe harbors

The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.

Facts and circumstances test

If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.

Events deemed as unforeseen circumstances

Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.

If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.

The actual date a business asset is placed in service is important because it affects when depreciation may be claimed for tax purposes. Depreciation begins in the tax year that an asset is placed in service. The placed-in-service date is especially important in the case of end-of-tax year acquisitions.

The actual date a business asset is placed in service is important because it affects when depreciation may be claimed for tax purposes. Depreciation begins in the tax year that an asset is placed in service. The placed-in-service date is especially important in the case of end-of-tax year acquisitions.

If an asset is placed in service on December 31 by a calendar-year taxpayer, depreciation is claimed on that asset for that tax year. If the same asset is placed in service one day later on January 1, depreciation deductions cannot be taken before that new year. The placed-in-service date also determines whether certain mid-quarter and half-year "conventions" will apply, which can mean greater depreciation deductions if purchase and use are timed just before the quarter or mid-year cut off date.

An asset is placed in service on the date that it is in a condition or state of readiness for a specifically assigned function in a trade or business or the production of income, which is not necessarily the date of acquisition. An asset that is being used in a trade or business is clearly placed in service. However, an asset not put to use is most likely not placed in service, unless everything in the taxpayer's power has been done to put the asset to use. An example of this is a canal barge that was deemed placed in service in the year it was acquired despite not being used until the following tax year because the canals were frozen.

Another related rule is that an asset will not be considered placed in service until the business actually begins operations. For example air conditioners installed in a grocery store before the store's opening were not considered placed in service until the store was actually open for business. In many instances this is not a bad thing, since a startup business usually has a limited amount of income during its first year to offset with depreciation deductions. Depreciation deductions in that case generally are more valuable later in the business's development.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.

Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:

Who are your taxable workers?

What payroll taxes apply?

What compensation is taxable?

When are your payroll taxes due?

What payroll and other returns should you file?

Taxable workers

The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.

It's more likely that you hire employees. In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.

There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.

If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.

What taxes apply

Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.

You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.

Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.

Compensation

Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.

There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.

Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.

Deposit schedule

Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.

Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.

Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.

Forms

If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.

The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.

Penalties are costly

Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.

The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.

You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.

Reporting obligations

Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.

Staying out of trouble with the IRS

Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.

No, parking tickets are not deductible. Internal Revenue Code Sec. 162 (a) provides that no deduction is allowed for fines or penalties paid to a government (U.S. or foreign, federal or local).

No, parking tickets are not deductible. Internal Revenue Code Sec. 162 (a) provides that no deduction is allowed for fines or penalties paid to a government (U.S. or foreign, federal or local). While many delivery businesses consider parking tickets as a cost of doing business and more akin to an occasional "rental" payment for a place to park, a parking ticket is a fine and, as such, it is not deductible. By definition, parking tickets are civil penalties imposed by state or local law. The Tax Court decided that parking tickets are not business deductions way back in 1975 in a case dealing with a taxpayer that was trying to deduct as a business expense some parking tickets, among other things. The court allowed the other deductions but did not allow the parking tickets, citing Code Sec. 162.

The AMT is difficult to apply and the exact computation is very complex. If you owed AMT last year and no unusual deduction or windfall had come your way that year, you're sufficiently at risk this year to apply a detailed set of computations to any AMT assessment. Ballpark estimates just won't work

The AMT is difficult to apply and the exact computation is very complex. If you owed AMT last year and no unusual deduction or windfall had come your way that year, you're sufficiently at risk this year to apply a detailed set of computations to any AMT assessment. Ballpark estimates just won't work.

If you did not owe AMT last year, you still may be at risk. The IRS estimates that half million more individuals will be subject to the AMT in 2006 because of rising deductions and exemptions. If Congress doesn't extend the same AMT exclusion amount given in 2005, an estimated 3 million more taxpayers will pay AMT.

For a system that was intended originally to target only the very rich, the AMT now hits many middle to upper-middle class taxpayers as well. Obviously something has to be done, and will be, eventually, through proposed tax reform measures. In the meantime, expect AMT to be around for at least another year.

Basic calculations. Whether you will be liable for the AMT depends on your combination of income, adjustments and preferences. After all the computations, if your AMT liability exceeds your income tax liability, you will be liable for the AMT. Here are the basic steps to take to determine in evaluating whether you will owe the AMT:

Step #1: Calculate your regular taxable income. If your regular tax were to be determined by reference to an amount other than taxable income, that amount would need to be determined and used in the next steps.

Step #2: Calculate your alternative minimum taxable income (AMTI) by increasing or reducing your regular taxable income (or other relevant amount) by applying the AMT adjustments or preferences. These include business depreciation adjustments and preferences, loss, timing and personal itemized deductions adjustments, and tax-exempt or excluded income preferences. This is the step with potentially many sub-computations in determining increases and reductions in tax liability.

While no single factor will automatically trigger the AMT, the cumulative result of several targeted tax benefits considered in Step #2, above, can be fatal. Common items that can cause an "ordinary" taxpayer to be subject to AMT are:

All personal exemptions (especially of concern to large families);

Itemized deductions for state and local income taxes and real estate taxes;

Itemized deductions on home equity loan interest (except on loans used for improvements);

You've waited until the last minute to fill out your income tax return. Instead of owing more taxes to the IRS, as you feared, you discover that you're entitled to a big refund. You breathe a sigh of relief.

You've waited until the last minute to fill out your income tax return. Instead of owing more taxes to the IRS, as you feared, you discover that you're entitled to a big refund. You breathe a sigh of relief.

What's wrong with this picture?

You're parking your money with the IRS; in effect, you have made an interest-free loan to the U.S. government. Wouldn't you rather have the money yourself, sooner?

It's true that you can't anticipate every facet of your tax return. You may have last-minute medical expenses. You may decide to increase your end-of-the year charitable giving. You may decide to sell off that investment that's a money-loser. Last-minute actions like these will all reduce your tax liability.

Over-Withheld?

But if you're getting a sizeable refund, you may want to reduce your income tax withholding this year. You should consider reducing your withholding in the following circumstances:

You got a big refund and your tax items will be about the same.

Your income will remain the same but your adjustments, deductions and credits will increase significantly.

You got a refund and you will qualify for one or more tax credits this year that you did not qualify for last year.

Any of the following common situations during a tax year also can lead to over-withholding:

You and your spouse both withhold at the individual rate, when one of you could withhold at the lower married rate.

You had child care expenses.

You bought a home with a higher mortgage.

You worked part-time but withheld at the higher annual rate as if you were working full-time.

You bought a hybrid automobile and can claim a deduction or credit.

The unpredictable

Of course, a larger-than-expected refund also can be the result of uncovering "hidden treasures" at tax preparation time -- unexpected deductions and other tax benefits that will lower the amount of income taxes that you thought you would have to pay. That's terrific; tax return time often does result in "finding" deductions and opportunities for post-year end tax planning as you pour over receipts and other paperwork. However, to what degree could many of these "hidden treasures" be discovered earlier and your tax withholding and estimated tax payments lowered earlier as a result?

If your circumstances change, or you want to make any changes to your withholding allowances, give your employer a new Form W-4. If you're starting a new job and are having trouble determining your withholding amount, you should still submit Form W-4. Otherwise, the employer must withhold at the highest rate.

Please contact this office if you need assistance in determining the right balance of wage withholding and estimated tax payments needed to cover your tax liability while not giving Uncle Sam an interest free loan. Remember, when you get a tax refund you are getting back money that you did not have to pay into the tax system in the first place.

Q. A promising investment opportunity proved too good to be true and I have incurred some stock losses. I still have faith in the company and don't want to abandon it but can I use some of these losses to offset gains from other stocks? If I sell these shares at a loss and immediately buy them back, what would the tax consequences be?

Q. A promising investment opportunity proved too good to be true and I have incurred some stock losses. I still have faith in the company and don't want to abandon it but can I use some of these losses to offset gains from other stocks? If I sell these shares at a loss and immediately buy them back, what would the tax consequences be?

A. The IRS calls these transactions "wash sales." Very simply, a wash sale takes place when a person sells stocks or bonds at loss and buys substantially similar stocks or bonds within 30 days. The wash sale rules are intended to curb this practice, which the IRS views as done only for tax reasons.

Here's an example:

Donna invested part of her inheritance in an airline company. Donna purchased 3,000 shares of the airline's stock. Two years later, the airline is teetering on bankruptcy. Donna sells 1,000 shares at a loss of $2,000. Less than one month later, Donna buys another 1,000 shares of the same company's stock for $5,000. Instead of allowing the deduction of the $2,000 on Donna's return, the wash sale rules require Donna to adjust the basis of her newest purchase to $7,000. When Donna sells the stock later at $10,000, instead of having a $5,000 gain ($10,000 sales price minus $5,000 purchase price), Donna's gain would only be $3,000 ($10,000 sales price minus $7,000 adjusted basis).

The wash sale rules can be made less harsh with careful planning. You must keep good track of the purchase and sale dates of your securities overall.

If you decide to reinvest in a similar investment vehicle, make sure that some element of the new security is different enough to avoid the "substantially similar" rule. For example, if you sell a stock mutual fund, you can purchase another type of stock mutual fund. Or if you sell shares in one oil company, you can purchase stock in another oil company and therefore maintain your position in that specific industry.

This is merely a brief introduction to the wash sale rules. If you have any questions or are concerned that a transaction you entered into could be viewed by the IRS as a wash sale, give our office a call. We'll be happy to take a look at your portfolio and help you avoid any potential wash sale troubles.

When trying to maximize retirement savings contributions, you may find you have contributed too much to your IRA. Typically, you either have too much income to qualify for a certain IRA or you can't recall what contributions you made until they are added up at tax time and you discover they were too much. There are steps you can take to correct an excess contribution.

When trying to maximize retirement savings contributions, you may find you have contributed too much to your IRA. Typically, you either have too much income to qualify for a certain IRA or you can't recall what contributions you made until they are added up at tax time and you discover they were too much. There are steps you can take to correct an excess contribution.

What is an excess contribution?

An excess contribution is the amount by which your total contributions to one or more IRAs exceed the applicable dollar limit for the tax year. For tax years 2005 through 2007, the maximum annual combined contribution to a taxpayer's traditional IRAs and Roth IRA is $4,000. For those 50 years or older, an additional $500 is allowed in 2005, and $1,000 for 2006 and subsequent years.

Your total contributions also include any rollover contributions completed more than 60 days after a distribution is received from a qualified plan or an IRA. If you contribute more than the allowable amount to all IRAs, the excess is subject to a six percent excise tax.

The six percent tax is nondeductible. The tax applies in each subsequent year if excess is not withdrawn or eliminated by treating it as allowable contribution in a future year. The excise tax is also imposed on excess contributions to a Roth IRA. This tax is reported on Form 5329, Additional Taxes Attributable to IRAs, Other Qualified Retirement Plans, Annuities, Modified Endowment Contracts, and medical savings accounts (MSAs).

Steps to take

The IRS treats an amount distributed from an IRA to the individual making the contribution, before the due date (including extensions) of the individual's tax return, as not contributed to the IRA. If your excess contribution was made by mistake, you can avoid the excise tax on excess contributions (and premature withdrawals) by withdrawing the contribution and any earnings on the contribution, on or before the due date, including extensions, of your return.

Keep in mind that IRA contributions can only be made up to the due date of the return excluding extensions. The "corrective distribution" can be made up to the due date of the return including extensions.

If you withdraw the contribution in a timely manner, you don't have to include the contribution in your gross income if no deduction is allowed and the interest attributable to the contribution is returned. The interest, however, must be included in your income for the year the contribution was made.

It's very important that you make certain that contributions to your IRA do not exceed the allowable limits. Otherwise, you could be paying the six percent excise tax. Fortunately, there are remedies. If you discover that you have over-contributed to your IRA, please contact our office immediately. We can help you correct your excess contribution.

Starting for tax year 2005, businesses have been able to take a new deduction based on income from manufacturing and certain services. Congress defined manufacturing broadly, so many businesses -just not those with brick and mortar manufacturing plants-- will be able to claim the deduction. The deduction is 3 percent of net income from domestic production for 2005 and 2006. This percentage rises to 6 percent and then 9 percent in subsequent years.

Starting for tax year 2005, businesses have been able to take a new deduction based on income from manufacturing and certain services. Congress defined manufacturing broadly, so many businesses -just not those with brick and mortar manufacturing plants-- will be able to claim the deduction. The deduction is 3 percent of net income from domestic production for 2005 and 2006. This percentage rises to 6 percent and then 9 percent in subsequent years.

Domestic production includes the manufacture of tangible personal property and computer software in the U.S. It also includes construction activities and services from engineering and architecture. Income from these activities must be calculated on an item-by-item basis and cannot be determined by division, product line or transaction. Direct and indirect costs are subtracted to determine "qualified production income." Land does not qualify as domestic production property.

The 3 percent rate is applied to the lower of net income from domestic production and overall net income. That amount is then capped at 50 percent of wages paid out by the employer for all its business activities.

Example. In 2005, Company X has $300,000 of income from domestic production activities. The company's overall net income was $500,000. The 3 percent rate is applied to $300,000, yielding a potential deduction of $9,000.

Company X paid its employees $50,000 in wages and reported this amount on Forms W-2 for 2005. Since the deduction is limited to 50 percent of wages paid and reported, Company X's deduction for 2005 is capped at $25,000 (50 percent of $50,000 in wages). X is entitled to a $9,000 deduction.

W-2 wage limitation

In some cases, the W-2 wage limit can easily trip up taxpayers. A successful sole proprietor who earns income but has no employees would not have any W-2 wages and, therefore, could not take the deduction. Self-employment income is not treated as wages. Neither are payments made to independent contractors. A small business that is incorporated but has no employees would have the same problem. Because payments to partners are not W-2 wages, a partnership with two partners and no employees also would be unable to take the deduction. Sole proprietors and other small businesses may want to consider putting a family member on the payroll, so that they have W-2 wages to satisfy this requirement.

An incorporated business, such as an S corporation, could put an owner on the payroll and apply the W-2 limit to reasonable wages paid to the owner. Employees include officers of the corporation and common law employees, as defined in the Tax Code. The more labor-intensive the manufacturing process, the more likely that a deduction will not be reduced by the W-2 wage limitation. The more automated the manufacturing process, the more likely it is that the manufacturer will find itself restricted by the wage limitation and not be able to take the full manufacturing deduction.

Code Sec. 199 defines W-2 wages as the sum of the total W-2 wages reported on Forms W-2, "Wage and Tax Statement," for the calendar year ending during the employer's taxable year. W-2 wages are defined as wages and deferred salary that is included on Form W-2. Deferred salary includes elective deferrals for a 401(k) plan or tax-sheltered annuity; contributions to a plan of a state and local government or tax-exempt entity; and designated Roth IRA contributions. IRS guidance provides three methods for calculating W-2 wages.

Our office can help you determine your eligibility for the manufacturing deduction and the amount of the deduction. Give us a call today.

Small businesses are getting a break from filing quarterly employment tax returns. The IRS will permit some small employers to file their employment tax returns annually instead of quarterly. The IRS is sending out letters about the new program to small businesses in February. If you receive a letter from the IRS, give our office a call and we'll help answers any questions you have. If you don't receive a letter from the IRS and believe you qualify for the program, we'll get in touch with the IRS for you.

Small businesses are getting a break from filing quarterly employment tax returns. The IRS will permit some small employers to file their employment tax returns annually instead of quarterly. The IRS is sending out letters about the new program to small businesses in February. If you receive a letter from the IRS, give our office a call and we'll help answers any questions you have. If you don't receive a letter from the IRS and believe you qualify for the program, we'll get in touch with the IRS for you.

Who is eligible?

The letter from the IRS will tell you that you are eligible to participate in the "Employers' Annual Federal Tax Program (Form 944)." This program is also known as the "Form 944 Program." Form 944 is the new form you will use instead of Form 941, which you are currently filing.

The Form 944 Program is only open to "small employers." For this program, the IRS is defining "small employers" as employers whose estimated annual employment tax liability is $1,000 or less. Since employment tax liability includes income tax withholding and FICA taxes, the IRS estimates that having a quarterly payroll of $4,000 or less generally will qualify a business for annual filing.

If you receive a letter from the IRS, you must participate in the Form 944 Program and file your employment returns annually unless you tell the IRS otherwise. You will use new Form 944 instead of Form 941.

Once in the program, you must file Form 944 even if your actual employment taxes for the year will exceed $1,000. When your employment taxes exceed $1,000, the IRS will notify you that you are no longer eligible for the program and you will have to file Form 941.

Opt-out feature

The IRS is allowing some small employers to opt-out of annual filing. You can opt-out of the program if you prefer to electronically file quarterly Form 941 or if you anticipate your employment tax liability will exceed $1,000. Before you decide to opt-out, let's sit down and review the benefits of the new program in more detail.

New businesses

New businesses that expect to owe $1,000 or less in total annual employment taxes are eligible.

If you are starting a new business, you won't receive a letter from the IRS about the Form 944 Program. You will have to tell the IRS that you want to participate. Our office will alert the IRS when we apply for your Employer's Identification Number (EIN). The IRS will either accept you into the Form 944 Program when it issues your EIN or tell you that you are ineligible.

Special circumstances

You may be unsure if your employment tax liability will exceed $1,000. The IRS has made some contingency plans so you won't be penalized.

You can avoid the penalty for failing to make a timely monthly deposit for your January taxes if the entire January balance is paid in full by March 15 of that year. Normally, the taxes would be due on February 15, just two weeks after the January 31 deadline, but the IRS is extending the deadline to March 14.

Example. You decide to participate in the Form 944 Program throughout 2007. In January 2008, you file your annual employment tax return and realize that your employment tax liability was higher than the $1,000 threshold. It was $5,500. Because you exceeded the $1,000 threshold for 2007, you are not eligible for the Form 944 Program in 2008. You must therefore make monthly deposits in 2008, including one for the month of January. Usually, you would have to pay January 2008 employment taxes by February 15, 2008 but the IRS is making a special exception. You will have until March 15, 2008 to catch up.

More changes possible

The Form 944 Program is likely just the beginning of more simplification for small businesses. The IRS is also considering allowing more employers to become quarterly filers. Toward that end, the IRS has proposed raising the threshold level for paying quarterly from $1,000 to $2,500. We will keep you posted on developments so that your business may make maximum use of the changes taking place for federal employment tax reporting and payment.

You can now obtain an automatic six-month extension to October 15 to file your income tax return, Form 1040 -- four months if you are out of the country. You no longer need to ask for an additional two-month extension and do not have to give a reason for your extension request. To obtain the automatic extension, you must submit your request by April 15 (the original due date of the return). Be aware that the IRS will not grant an extension beyond six months.

You can now obtain an automatic six-month extension to October 15 to file your income tax return, Form 1040 -- four months if you are out of the country. You no longer need to ask for an additional two-month extension and do not have to give a reason for your extension request. To obtain the automatic extension, you must submit your request by April 15 (the original due date of the return). Be aware that the IRS will not grant an extension beyond six months.

Comment. Previously, you could obtain an automatic four-month extension on Form 4868 but then had to apply on Form 2688 for an additional two-month extension.

There are three ways to file for an extension.

You can file a paper Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. The form will ask you for an estimate of your tax liability.

You can file for an extension electronically using a tax software package or the services of a tax preparer. You should have your previous return available so that you can provide information used to verify your identity.

You can pay part or all of your income tax by phone or electronically, using a credit card. Form 4868 gives the names of two service providers that you can use. The service providers will charge you a fee.

Reminder. An extension of time to file your return does not extend the deadline for paying the taxes you owe. The IRS will charge interest (and may charge penalties) from April 15 to the date you file your return. To minimize these charges, you should file your return as soon as possible, rather than waiting until October 15.

If you file a paper request, it's a good idea to send it certified mail, return receipt requested. If you file your request electronically, you should receive an acknowledgment and a confirmation number.

Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.

Information returns usually arrive in January or February and consist of either Form 1099 or Form 1098. For some, they seem as ubiquitous as their holiday mail in December. Form 1099s are especially likely to populate your mailbox, being used to report a whole array of income other than wages, salaries and tips. While a Form 1099 is not needed to record every taxable transaction, one Form 1099 can record multiple transactions; for example, from your broker for dividends and stock trades. The payer will send a Form 1099 to you by the end of January and will file the form with the IRS by the end of February. Typical forms are sent out for dividend and interest income, self-employment or independent contractor's income, student loan interest and mortgage interest statements.

If you happen to receive an incorrect information return, there is no need to panic. However, you do need to act quickly to prevent a bigger problem; namely, having your tax return not match what your information returns say. Therefore, the first step to take when receiving any Form 1099 or 1098 is to open it immediately and take a look at whether it reflects the amount that you think should be reported. If the Forms just sit unopened in your shoe box until you bring it for return preparation, valuable time has been lost.

Should you determine that you have received an incorrect information return, first contact the entity providing the form and ask for a corrected form. Use the number the sender provides on the form. You should receive a revised form that has "corrected" marked on it. Sometimes the information provider itself catches a mistake and sends you a corrected form without your having to ask.

Sometimes, the discrepancy on an information return may be the result of a difference of opinion in interpreting the tax law. This can occur, for example, when determining in which tax year a transaction falls, or whether forgiveness of indebtedness income exists on a contested loan. In those cases, it is best to first try to persuade the information return provider to change its mind rather than just reporting the transaction on your return based on your interpretation. Once the IRS becomes aware of a difference of opinion, the issue usually will take a lot more effort to resolve.

If all else fails in your trying to correct an information return with the return provider, after February 15, 2013 you should contact the IRS at (800) 829-1040. An IRS agent will assist in filing a complaint by sending Form 4598 to the payer requesting that a corrected form be sent out. If no corrected Form is issued, you will have to file a Form 4852 which will allow for you to claim the true amount on your tax return. If you have already filed and have received a form not reported or forget to report income, you are obligated to file a Form 1040X to report income that was not previously reported.

Penalties do exist for payers who fail to provide you with the correct payee statements when they cannot show reasonable cause for the failure. However, if you operate a business and also wear the hat of an information provider, you'll be glad to know that inconsequential error or omission will not be considered a failure to include the correct information.

Nevertheless, both the party who provides and who receives an information return have obligations under the tax law that must be met in good faith and with reasonable efforts to comply. Otherwise, the IRS will not hesitate to use its penalty powers.

Please feel free to contact this office if you have any concerns over an incorrect information return over this coming tax season.

Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables provided in IRS Regulation Sec. 1.72-9.

Amounts received as an annuity are included in gross income to the extent that they exceed the exclusion ratio, which is determined by taking the original investment in the contract, deducting the value of any refund features, and dividing the result by the expected yield on the contract as of the annuity starting date. In general, the expected return is the product of a single payment and the anticipated number of payments to be received, i.e., the total amount the annuitant can expect to receive. In the case of a life annuity, the number of payments is computed based on actuarial tables provided in IRS Regulation Sec. 1.72-9.

If a contract provides for fixed payments to be made to an annuitant for a guaranteed period but specifies that the payments will cease on the annuitant's death, the expected return is computed as if the arrangement were a temporary life annuity rather than a fixed term annuity. The applicable IRS tables under Regulation Sec. 1.72-9 contain multiples based on the guaranteed period (rounded to the nearest whole number of years) and age at the annuity starting date. The expected return under the contract is the product of this multiple and the total annual amount of annuity payments.

Example: Smith is to receive $100 each month for five years, beginning on his 60th birthday, but the payments will cease abruptly and all obligations will be terminated on his death. Either Pursuant to Table IV under IRS Regulations Sec. 1.7209, a 60-year-old male receiving payments for a term of five years can expect to live 4.8 of those five years; that multiple multiplied by $1,200 yields an anticipated return of $5,760. If Table VIII is applicable, the expected return is $5,880, based on a multiple of 4.9.

Another form of annuity provides for fixed periodic payments for the duration of the recipient's life, but for a changing amount: payments of a first amount for an initial guaranteed period, followed by payments of a reduced amount thereafter. In determining the expected return, the contract is treated as a combination of two annuities: (1) a whole life annuity providing payments at the lower amount, commencing at the annuity starting date; and (2) a separate temporary life annuity, of the kind discussed above, providing payments in the amount of the difference between the two specified amounts.

Q: After what period is my federal tax return safe from audit? A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

Q: After what period is my federal tax return safe from audit?

A: Generally, the time-frame within which the IRS can examine a federal tax return you have filed is three years. To be more specific, Code Sec. 6501 states that the IRS has three years from the later of the deadline for filing the return (usually April 15th for individuals) or, if later, the date you actually filed the return on a requested filing extension or otherwise. This means that if you file your 2014 return on July 10, 2015, the IRS will have until July 10, 2018 to look at it and "assess a deficiency;" not April 15, 2018.

There are exceptions and caveats to this general principle, however. If you file prior to April 15, the IRS still has until April 15 of the third year that follows to audit your return. This means that if you filed an income tax return on February 10, 2017, you still won't be out-of-the-woods until April 15, 2020. For taxpayers who file fraudulent returns, incorrect returns with the intent to evade tax, and those who do not file at all, the IRS may open an audit at any time.

(Don't confuse the deadline for IRS tax assessments with your right to file a refund claim for an amount that you overpaid, either on a filed return or through withholding or estimated tax payments. That deadline is the later of three years from the filing deadline or two years from your last tax payment.)

You may also find some comfort in the practical IRS audit-cycle rhythm. While you are never truly beyond an audit until the statute of limitations has properly run, there are some general standards to keep in mind. Office audits are usually done within 1 1/2 years of the time the return was filed, and field office audits are complete by 2 1/2 years. The rule of thumb is that if you haven't been contacted within this time frame, you're probably not going to be. Especially for small businesses, the IRS has promised to shorten its normal audit cycle so that those taxpayers are not "left hanging" on potential tax liabilities (with interest and penalties) until the three-year limitations period has expired. Whether this shortened period happens, however, is still open to speculation. Most businesses should continue to make it a practice to keep "tax reserves" to cover such audit liabilities.

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?

Holiday season - a time for giving to friends and family, but not, you hope, to the IRS. Many, if not most, people are aware that the Tax Code imposes a tax on certain gifts, but not everyone is certain as to how this works. How do you know when you've given the gift that keeps on taking - a taxable gift?

Exclusion Amount

The general rule is that there is a designated limit above which gifts become taxable to the giver. For the 2009 tax year, that limit is $13,000. The gift tax threshold is from each donor to each recipient per year. In other words, a donor may give multiple gifts to a single recipient in 2009 up to $13,000, and may repeat this with an unlimited number of recipients without incurring gift tax liability.

Furthermore, married couples may give up to $26,000 during 2009 to each recipient in a year without incurring tax, but to do this, they must indicate on a gift tax return that they are electing to split the gift.

Contributions to so-called 529 plans are subject to this limitation, except that a donor may "front-load" giving by contributing up to $60,000 to an individual's account in a single tax year and counting the gift against that year and the four succeeding years. This does make any gifts to that individual in the subsequent years taxable.

Exceptions to the Rule

Some gifts do not count against this threshold. There is no limitation on gifts to spouses or charitable organizations (although there are limits on the tax benefits of charitable contributions). Payments for medical or educational expenses also do not count against the threshold if the money is paid directly to the source of the expenses. A gift of $15,000 to a relative for college tuition is a taxable gift, but a $15,000 payment to the college is not.

Even when a gift exceeds the threshold, it is not necessary to pay tax on the gift. This is because in addition to the annual exclusion amount, there is a lifetime credit against the estate and gift tax. The credit effectively exempts the first $3.5 million of taxable gifts from gift tax in 2009, and must be claimed by filing a gift tax return, Form 709.

The gift tax applies not only to gifts of cash, but also to property. The value of property given as a gift counted against the exclusion amount is the fair market value of the property at the time of the gift, whether the gift is of stocks and other securities or more traditional holiday presents, including food and drink.

The Business Context

Sometimes, gift giving makes for good business. However, even if you give an employee or business contact a gift completely out of gratitude, with no expectation of profit in return, the IRS treats these gifts as business gifts. As such, certain tax rules apply. Gifts of cash within a business context are always taxed to the recipient, whether an employee, contractor or other business. Gifts of property are similarly taxed subject, however, to a de minimis exception for small gifts of approximately $35 or less. The silver lining for this rule is that if it is taxable to an employee, it is also deductible by the employer. In addition, that rule also has a favorable exception within it: the employer may deduct the cost of a de minimis gift or the cost of a general holiday office party (subject to the entertainment deduction limitations).

To sum up, a taxable holiday gift occurs when the total value of all gifts, both of money and property, to an individual over the course of a year, excluding direct payments for medical and educational expenses, exceeds the exclusion amount, which is currently $13,000. When given with a business context, however, it is the recipient and not the giver who is generally subject to tax. Nevertheless, certain important exceptions apply within that general rule. If you need further assistance in sorting out the tax repercussions of holiday gift giving, please feel free to contact this office.

Given a choice between recognizing income now or in a later year, most people want to be paid now and be taxed in a later year. As a practical matter, however, an employee cannot defer compensation after performing services and becoming entitled to payment. Routine compensation earned over a prescribed pay period -- a week, two weeks, or a month, for example - usually is paid or made available in the same year it was earned. Recognition of the income cannot be put off to a later year.

Given a choice between recognizing income now or in a later year, most people want to be paid now and be taxed in a later year. As a practical matter, however, an employee cannot defer compensation after performing services and becoming entitled to payment. Routine compensation earned over a prescribed pay period -- a week, two weeks, or a month, for example - usually is paid or made available in the same year it was earned. Recognition of the income cannot be put off to a later year.

If the employee earns compensation in one year but will not receive it until the following year, the amount is treated as deferred compensation (unless the employer has funded or secured its obligation to pay, or the 2 1/2 month rule, noted below, applies). If an amount is treated as deferred compensation, the employer cannot take a deduction until the year the employee includes the compensation in income. This rule applies even if the employer is on the accrual basis and all events have occurred that entitle the employee to a specific bonus amount. This "matching" principle is contained in Code Sec. 404(a)(5).

The 2 1/2 Month Rule

However, payments made in the first 2 1/2 months of the end of the year that the services were performed are not treated as deferred compensation. This allows the employer to accrue and deduct the compensation in the year it is earned (the year the services were performed), not the later year when it is paid. Nevertheless, the employee still is entitled to defer his or her recognition of income into the next year if certain conditions are satisfied.

Employers who want to spare their employees from being taxed in the year a bonus is earned should not make any amounts available to the employee until the following year. This is particularly important if the employee earns a bonus based on an objective measure, such as corporate earnings. If the bonus is paid solely in the employer's discretion, the amounts will not be taxable until the year paid. If the bonus is paid within the first 2 1/2 months of the following year, the amount is not deferred compensation, and an accrual-basis taxpayer can deduct the bonus in the year the employee performed the services.

Elective Deferral Requirements

If an employer wants to give the employee an election to defer the bonus, it is necessary to look to Code Sec. 409A, enacted in the American Jobs Creation Act of 2004. Under Code Sec. 409A, a bonus based on measures of the company's or the individual's performance is treated as deferred compensation. If the bonus is based on services performed over a 12-month period or longer, the employee must make an election to defer income at least six months before the end of the bonus period.

You've just disposed of a collectible item (or your entire collection), such as an old coin, artwork, figurine, or even those old baseball cards you somehow managed to keep away from the spokes of your bike and your mother's desire to clear some space, and got a sum of money for your efforts. Congratulations, you've just had a taxable event. How do you calculate your gain (assuming you actually have one) so that you can pay the taxes? To do this, you need to answer a few more questions.

You've just disposed of a collectible item (or your entire collection), such as an old coin, artwork, figurine, or even those old baseball cards you somehow managed to keep away from the spokes of your bike and your mother's desire to clear some space, and got a sum of money for your efforts. Congratulations, you've just had a taxable event. How do you calculate your gain (assuming you actually have one) so that you can pay the taxes? To do this, you need to answer a few more questions.

Basis

The starting point for any inquiry regarding the computation of gains is basis. This is true whether you have sold collectibles, securities or even real estate. So the first question you must answer is "How did you acquire it?"

If you bought the item, then calculation of basis starts with your acquisition cost. This not only includes what you paid for the item, but also certain expenses related to the acquisition. For instance, if you were looking for a specific item that you later purchased, your costs incurred in the search, to the extent that they can be substantiated, should also be included. Examples of these costs include travel to the locations where you hoped to find your collectible, catalog costs, and any fees paid that were not dependent on a purchase (such as an admission fee charged at an antiques show). Fees related to the sale itself should also be included, such as a broker's or auctioneer's fee or an appraisal and authentication fee.

If you inherited the item, then your basis was the item's fair market value at the time of the inheritance. Fair market value may be determined using either of two principal methods. The item might have been appraised for estate purposes, for example. Another means of determining the value would be contemporaneous sales of comparable items. This can be tricky, because condition means so much to the value of a collectible.

If the item was a gift from a living person, then your basis is the same as that of the person who gave it to you. This means you need to know how the donor acquired it, and start the calculations over again from that point.

If you traded another piece of property, such as another collectible, to acquire the piece you just sold, then your basis in the new item is the same as your basis in the previous item, unless at that time you calculated a gain on the exchange and reported it on that year's taxes. If you did the latter, your basis in the item you acquired is the amount you reported that you realized at the time of the exchange. If you did not report a gain (or loss), go back to how you acquired the original item and start over.

The next important question is "How did you maintain the item?" Once you acquired the item, you may have incurred additional costs to maintain your collectible in its condition, or to restore it from its condition at purchase. Whether this meant payments to a professional or purchase of materials for the express purpose of maintenance, these costs may be included. However, the cost of reusable items must be allocated among any other collectibles also stored, restored or maintained.

Finally, you must answer the question "How did you dispose of the item?" You might have sold the item at an auction, whether a live auction or over the internet, or through a broker. You might also have advertised the sale of the item in a magazine, newspaper or catalog. An appraisal might have been necessary to determine your asking price. Costs related to the sale should be subtracted from the amount of the sale price. If your collectible was destroyed and you received an insurance settlement at replacement value, but did not replace the item, then the amount you were paid is a substitute for a sale price. This is called the amount realized.

Capital Gains

Once you have determined your basis in the collectible, by taking your acquisition costs, the basis of the person who gave you the collectible, or the fair market value at the time you inherited it, and adding to it your maintenance costs, you subtract the basis from the amount you realized. This is your capital gain.

Capital gains on collectibles are taxed at a maximum rate of 28 percent (as opposed to a maximum rate of 15 percent for most other capital gains), and the capital gains are reported on Schedule D of Form 1040. If you are a typical collector, then you are not treating your purchase and sale of collectibles as a business, and this is how you should report gains and losses.

Ordinary Income

If you buy and sell collectibles on a regular basis, have developed a degree of skill in identifying profitable transactions and devote a substantial portion of time and effort to this activity, you may be engaged in a trade or business. If so, then your stock of collectibles is inventory, and your profits are taxable as ordinary income. However, with that tax disadvantage can come significant opportunities to deduct office-at-home expenses and a variety of other business-related costs.

If you collect --for either business, pleasure, or both--feel free to call this office for advice on how to best organize your collection so that Uncle Sam collects the minimum in taxes from your efforts.

The tax rules are very liberal for individuals in the armed forces who are serving in a combat zone. The combat zone extension automatically extends the date for paying tax or claiming a refund, as well as for filing. The extension also applies to paying estimated tax.

The tax rules are very liberal for individuals in the armed forces who are serving in a combat zone. The combat zone extension automatically extends the date for paying tax or claiming a refund, as well as for filing. The extension also applies to paying estimated tax.

Generally, the time period for filing returns, paying taxes or claiming a credit or refund is suspended for the period of the taxpayer's service in the combat zone plus 180 days. The time period is similarly suspended while the taxpayer is hospitalized because of a combat-related injury, or while the individual is missing in action, plus 180 days. If the taxpayer is hospitalized in the U.S., the maximum extension period is five years from the date the taxpayer returns to the U.S.

Example. Sandra is deployed to serve in a combat zone on September 15, 2005. Sandra does not make her third estimated tax payment for the year, due the same day. The combat zone extension extends her deadline for making her third estimated tax payment for the period of her service in the combat zone plus 180 days after her last day in the combat zone.

Who qualifies?

The extension is available to all persons serving in the U.S. Armed Forces in a combat zone. This includes regular military personnel as well as National Guard and Reserve personnel. Civilian support personnel under the direction of the U.S. Armed Forces also qualify.

Red Cross personnel serving in a combat zone also may take advantage of the extension. Accredited press correspondents similarly qualify.

Generally, mental disability must be permanent. However, you may be able to withdraw a portion up to the amount allowable as a medical expense deduction for the year.

Generally, mental disability must be permanent. However, you may be able to withdraw a portion up to the amount allowable as a medical expense deduction for the year.

Discouraging early withdrawals

When Congress created IRAs, it deliberately limited the ability of savers to take early withdrawals. Congress wanted people to save for retirement and not to use their savings for vacations or to purchase a car or a new computer. Most early distributions before age 59 1/2 trigger a penalty in the form of a 10 percent additional tax.

Special exception

Congress realized that life isn't predictable and physical or mental illness can hit a person at anytime. Congress made a special exception to the 10 percent penalty for individuals who become disabled before age 59 1/2.

The Tax Code sets out various criteria. A person is treated as disabled if he or she:

Is unable to engage in any substantial gainful activity;

Because of any medically-determinable physical or mental impairment;

Which can be expected to result in death; or

Will be of long-continued and indefinite duration.

The IRS has elaborated on these requirements in regulations. Mental impairment generally requires continued institutionalization or constant supervision.

Example. Sue is a stock trader. Sue is diagnosed as having a biochemical depression. She withdraws $20,000 from her IRA because she doesn't think she can continue working full-time. Unfortunately, the medication prescribed by her physician does not help her. Six weeks later, Sue consults a second physician. His treatment soon clears-up her condition and she is no longer on medication. Sue never had to miss any work during her illness. Sue is liable for the 10 percent additional tax because her disability did not require continued institutionalization or constant supervision and she was able to continue functioning as a stock trader in the face of her depression.

Medical expense deduction

You may be able to withdraw some of your IRA savings without penalty up to the amount allowable as a deduction for medical care. This is another special exception to the 10 percent additional tax.

For regular tax purposes, unreimbursed medical expenses must exceed 7.5 percent of adjusted gross income (AGI). On a joint return, the percentage limitation is based on the total AGI of both spouses. If you are liable for the alternative minimum tax (AMT), the percentage limitation is 10 percent.

It's back-to-school time and many families are looking for ways to stretch their education dollars. To help, there are some generous tax breaks. Deductions and credits are available and while they won't lower the cost of education, they can lower the tax bill.

It's back-to-school time and many families are looking for ways to stretch their education dollars. To help, there are some generous tax breaks. Deductions and credits are available and while they won't lower the cost of education, they can lower the tax bill.

Hope Scholarship credit

The Hope Scholarship credit can help pay for college as well as vocational training. The credit reaches $1,500 per student for the first two years of post-secondary education. It is a 100 percent credit for the first $1,000 and a 50 percent credit on the second $1000 paid in tuition and expenses other than books, healthcare costs, room and board or transportation.

Tax-free grants lower the amount of tuition that is eligible for the credit. The student must attend a qualified institution and no two taxpayers can claim the credit in the same year. This means that either the student or the student's guardian may take the credit, but not both.

The Hope Scholarship credit has special qualifications. The student cannot have completed the first two years of post-secondary education, must be enrolled at least half-time and cannot have been convicted of a felony drug charge.

Lifetime Learning credit

The Lifetime Learning credit is much akin to the Hope credit. It helps to offset the same expenses. However, this credit can be used in any year that the Hope is not taken. It's available for 20 percent of eligible expenses, up to a maximum of $2,000 per taxpayer, not per student.

Coverdell education savings accounts

Coverdell education savings accounts (ESAs) can also help pay for college, as well as secondary and elementary, schooling. The maximum annual contribution is $2,000 per beneficiary. Any distribution not made for education costs, will be taxed, and an additional 10 percent penalty will be added. This is also true of students whose distributions fund attendance at a military academy, if the student is expected to serve upon dismissal from the institution. Distributions are treated like gifts and may be used for tuition, books, supplies, and equipment.

Scholarships/ fellowships

Scholarships and fellowships, both for merit and financial need, are excluded from income if they are used to pay for tuition, and other related expenses such as books and supplies, but not incidentals, such as room and board. Some grants, such as those in exchange for services the student provides, for example, research, are treated like wages and are included in gross income. Athletic scholarships are not considered exchange for service.

Student loan interest payments

Student loans may also produce a tax break. There is a valuable above-the-line deduction for interest paid on education loans. For taxpayers making less than $50,000 ($100,000 for joint filers), $2,500 is deductible annually. Only the loan holder can take this deduction. If the loan is taken out in the student's name, but the parent is paying for it, the parent cannot deduct the interest.

Education costs are going up every year and these tax breaks, when they are used well, can help you save some money. Give our office a call today. We'll review your educational expenses and design a tax strategy that maximizes these valuable tax breaks.

The Tax Code encourages charitable donations by businesses and industries. In fact, it is one tax incentive that President Bush has told his tax reform panel that he wants to preserve and strengthen. Taxpayers can make many different types of contributions, including inventory.

The Tax Code encourages charitable donations by businesses and industries. In fact, it is one tax incentive that President Bush has told his tax reform panel that he wants to preserve and strengthen. Taxpayers can make many different types of contributions, including inventory.

Amount of deduction

The amount of your deduction is generally the fair market value (FMV) of the contributed property, reduced by the amount of income you would have recognized if you had sold the property. FMV is the price the property would sell for on the open market. This rule effectively limits your deduction to your basis in the property.

Example. Elsa owns and operates a retail clothing store. She donates inventory that she normally sells in the ordinary course of her business to a charity. The inventory has a FMV of $1,000. It cost $400. If Elsa had sold the inventory, she would have recognized $600 income. Elsa's charitable contribution deduction is $400, her basis in the donated property.

The fair market value of your inventory may be less than its basis. In this case, only the fair market value may be deducted.

Example. Owen also owns and operates a retail clothing store. He follows Elsa's lead and donates inventory that he normally sells in the ordinary course of his business to the same charity. The inventory has a fair market value of $1,000. It cost $1,800. If Owen had sold the inventory, he would have recognized an $800 loss. In this case, the FMV of Owen's inventory is less than its basis. Owen's charitable contribution deduction is limited to $1,000, the FMV of the donated inventory. In this case, Owen is probably better off selling the inventory, recognizing the loss and then contributing $1,000 cash, which is fully deductible.

Costs and expenses

Any costs and expenses pertaining to contributed property incurred in prior tax years must be removed from inventory if they are properly reflected in opening inventory for the year of contribution. They are not part of the costs of good sold. Costs and expenses incurred in the year of contribution, which are properly reflected in the costs of goods sold for that year, are treated as part of the costs of goods sold for that year.

If you are thinking of donating inventory to a charitable organization, give our office a call. We'll help you maximize this valuable deduction.

One of the easiest ways for a business to limit liability is to use independent contractors instead of employees. Of course, merely calling employees "independent contractors" will not make those individuals independent contractors.

One of the easiest ways for a business to limit liability is to use independent contractors instead of employees. Of course, merely calling employees "independent contractors" will not make those individuals independent contractors.

Control

The determination of whether a worker will be considered a contractor or an employee is a question of control. If the worker determines his or her own fees (usually per job), sets his or her own working hours, and provides his or her own tools, he can reasonably be considered an independent contractor. If the worker does not control his or her hours worked or wages, and uses tools provided for him or her by the employer, the worker is probably an employee.

There is a 20-factor common law test that can help determine if a worker is an independent contractor. It is important to work through the factors to determine the correct classification for the worker has been chosen, as the classifications have distinct consequences.

Benefits

The difference between independent contractors and employees is stark, and is not simply limited to the label of the worker.

Independent contractors need not be included in retirement plans. You will only have to pay the contractor gross pay, rather than withholding wages for tax purposes. As you need not pay Social Security, Medicare or unemployment insurance for an independent contractor, record keeping is much simpler.

Independent contractors are also responsible for their own tort and contract liability. If an independent contractor commits a tort, in most cases the contractor will be solely liable.

Proceed with caution

Use extreme caution when labeling workers. Mislabeling workers can lead to serious problems.

You could be responsible for back employment taxes, which are often considerable when interest and penalties attach. You could also be liable for damages in a tort claim decided against the mislabeled worker.

Tort liability for a mislabeled worker can have repercussions beyond the payment of the damages. If the worker is deemed to be an employee, the use of contractors instead of employees for liability limitation is lost, which can impact whether the business was operated in such a manner as to limit liability on the whole.

Using independent contractors can be a smart business move but without careful planning, you could be in for some expensive tax consequences. Give our office a call and we'll take a look at your options.

The closely-held corporate form of entity is widely used by family-owned businesses. As its name implies, the owners of the business are typically limited to a small group of shareholders. Many businesses operate for years as closely-held corporations without giving a second thought to a little-known danger: the personal holding company tax.

The closely-held corporate form of entity is widely used by family-owned businesses. As its name implies, the owners of the business are typically limited to a small group of shareholders. Many businesses operate for years as closely-held corporations without giving a second thought to a little-known danger: the personal holding company tax.

The personal holding company tax lurks in the background to prevent the use of closely-held family corporations as reservoirs in which to collect investment income. The government wants corporations to distribute income rather than enabling shareholders to build an investment portfolio subject only to the corporate income tax.

The tax is triggered by a corporation's percentage of investment to total income. It is imposed on undistributed earnings and is added to the regular corporate tax. One frequent trigger for the personal holding company tax is the accumulation of income earmarked for expanding the business. Despite its ominous nature, the tax can be anticipated and maybe even averted through strategic planning.

Some triggers

Here are some scenarios that have unfortunately triggered the personal holding company tax for other businesses:

A consolidated return group becomes unaffiliated, or an ineligible group, as the result of a change in stock ownership or a line of business

A large amount of insurance proceeds are invested until replacement property can be purchased

For asset protection purposes, a corporation holds investment assets or operating equipment without engaging in other operations

During a plan of liquidation, a line of business is sold and the sale proceeds are invested while management is attempting to sell remaining assets or businesses

As part of a plan to invest in a new line of business, a line of business is sold and the sale proceeds are invested while management is attempting to acquire a business or grow its new line of business

Two tests

It's important to remember that any corporation can be a personal holding company. The IRS has developed two tests: (1) an income test and (2) an ownership test.

Income test

The income test is met if 60 percent or more of the corporation's adjusted ordinary gross income is "personal holding company income." This type of income is frequently derived from investment properties and includes:

Interest, dividends and royalties,

Rents,

Mineral, oil and gas royalties,

Copyright royalties,

Produced film rents,

Amounts received in compensation for use of the corporation's property,

Compensation from personal contracts, where the corporation is not a personal service company, and

Estate and trust income.

There are some important exceptions to this list. Some types of royalties, for example, are excluded.

Note. The PHC income test is not a test of gross receipts. The income test compares gross receipts less the cost of goods sold to investment income less its direct costs. Gross profit margins are significant to the test and investment activities generally have few direct costs. Thus, an increase in investment income is leveraged for purposes of the PHC income test and an increase in investment income that is insignificant to total gross income can cause investment income to exceed 60 percent of adjusted gross income (AGI). Manufacturing businesses are at a disadvantage. Because of high cost of goods sold when compared to a service business that has little or no costs of goods sold.

Ownership test

The ownership test is met if five or fewer individuals owned more than 50 percent of the corporation's stock value at any time during the last half of the tax year. The ownership test also has some important exceptions. Some important - and common - types of corporations are excluded:

S corporations,

Tax-exempt corporations,

Banks, lending or finance companies,

Small business investment companies, and

Corporations in bankruptcy.

The personal holding company tax doesn't have to be an unwelcome and expensive surprise. If your business has experienced - or is planning - any of the events that could trigger the tax, give our office a call. Careful planning can help avoid or minimize the tax; at any rate, it can alert you to your possible liability for the tax.

Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.

First class travel

The IRS doesn't require that your business travel be the cheapest mode of transportation. If it did, businesspeople would be traveling across the country by bus instead of by plane. However, the expense as it is relative to the business purpose must be reasonable. Taking the Queen Mary II across the Atlantic to a business meeting in the U.K. could raise a red flag at the IRS.

As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.

However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses.

Conventions

Convention expenses are deductible if a sufficient relationship exists to your profession or business and the convention is in North America. No deduction is allowed for attending conventions or seminars about managing your personal investments.

Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.

Country clubs expenses

Country club dues are not deductible. In fact, no part of your dues for clubs organized for business, pleasure, recreation, or social purposes is deductible.

Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.

Meals and entertainment

Younger colleagues don't remember when business meals were 100 percent deductible and deals were brokered at "three martini lunches." Meals haven't been 100 percent deductible for a long time and, like other entertainment expenses, the IRS combs them carefully for abuses.

Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made at the time you make the expenditure, recording the time, place, amount and business purpose of each expense.

Even if you pass the two tests, only 50 percent of meal and entertainment expenses are deductible. If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

Whether a parent who employs his or her child in a family business must withhold FICA and pay FUTA taxes will depend on the age of the teenager, the amount of income the teenager earns and the type of business.

FICA and FUTA taxes

A child under age 18 working for a parent is not subject to FICA so long as the parent's business is a sole proprietorship or a partnership in which each partner is a parent of the child (if there are additional partners, the taxes must be withheld). FUTA does not have to be paid until the child reaches age 21. These rules apply to a child's services in a trade or business.

If the child's services are for other than a trade or business, such as domestic work in the parent's private home, FICA and FUTA taxes do not apply until the child reaches 21.

The rules are also different if the child is employed by a corporation controlled by his or her parent. In this case, FICA and FUTA taxes must be paid.

Federal income taxes

Federal income taxes should be withheld, regardless of the age of the child, unless the child is subject to an exemption. Students are not automatically exempt, though. The teenager has to show that he or she expects no federal income tax liability for the current tax year and that the teenager had no income tax liability the prior tax year either. Additionally, the teenager cannot claim an exemption from withholding if he or she can be claimed as a dependent on another person's return, has more than $250 unearned income, and has income from both earned and unearned sources totaling more than $800.

Bona fide employee

Remember also, that whenever a parent employs his or her child, the child must be a bona fide employee, and the employer-employee relationship must be established or the IRS will not allow the business expense deduction for the child's wages or salary. To establish a standard employer-employee relationship, the parent should assign regular duties and hours to the child, and the pay must be reasonable with the industry norm for the work. Too generous pay will be disallowed by the IRS.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home.

Owning a vacation home is a common dream that many people share...a special place to get away from the weekday routine, relax and maybe, after you retire, a new place to call home. When thinking about buying a vacation home, you should also think about what you will ultimately do with it. Will it one day be your principal residence? Will you sell it in five, 10 or 20 years? Will you rent it? Will you leave it to your children or other family members? These decisions have important tax consequences.

You'll want to think about:

Capital gains

The maximum long-term capital gains tax rate for 2009 is currently 15 percent taxpayers in the highest brackets. For taxpayers in the 10 and 15 percent brackets, the maximum long-term capital gains rate is zero through 2010. However, these lower rates expire at the end of 2010. The maximum rate is set to rise to 20 percent in 2011. Congress also eliminated a special holding period rule but, again, only through the end of 2011.

The process of computing capital gains because of all these changes is very complicated. Yet, "doing the math" up front in assessing the benefits of a vacation home as a long term investment as well as a source of personal enjoyment is recommended before committing to such a large purchase. Our office can help you make the correct computations.

Renting your vacation home

Renting your vacation home to help defray some or a good portion of your carrying costs, especially in the early years of ownership, can be a sound strategy. Be aware, however, that renting raises many complex tax questions. Special rules limit the deduction you can take. The rules are based on how long you rent the property. If you rent your vacation home for fewer than 15 days during the year, all deductions directly attributable to the rental are not allowed, but you don't have to report any rental income. If you rent your vacation home for more than 15 days, you must recognize the rental income while being allowed deductions only on certain items depending on your personal use of the property. The methodology is very complicated. We can help you pin down your deductions and plan the true cost of ownership, especially if you're planning to swing a vacation home purchase on plans to rent it out.

Home sale exclusion

One of the most generous federal tax breaks for homeowners is the home sale exclusion. If you're single, you can generally exclude up to $250,000 of gain from the sale of your principal residence ($500,000 for married joint filers). Generally, you have to have owned your home for at least two of the five years before the sale, but like all the tax rules, there are exceptions.

Congress modified the home sale exclusion for home sales occurring after December 31, 2008. Under the new law, gain from the sale of a principal residence home will no longer be excluded from gross income for periods that the home is not used as a principal residence. This is referred to as "non-qualifying use." The rule is intended to prevent use of the home sale exclusion of gain for appreciation attributable to periods after 2008 during which the residence was used as a vacation home, or as a rental property before being used as a principal residence. However, the new income inclusion rule is based only on periods of nonqualified use that start on or after January 1, 2009, good news for vacation homeowners who have already owned their properties for a number of years.

Buying a vacation home is a big investment. We can help you explore all these and other important tax consequences.

A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.

A remainder interest is the interest you receive in property when a grantor transfers property to a third person for a specified length of time with the provision that you receive full possessory rights at the end of that period. The remainder is "vested" if there are no other requirements you must satisfy in order to receive possession at the end of that period, such as surviving to the end of the term. This intervening period may be for a given number of years, or it may be for the life of the third person. Most often, this situation arises with real estate, although other types of property may be transferred in this fashion as well, such as income-producing property held in trust. The holder of a remainder interest may wish to sell that interest at some point, whether before or after the right to possession has inured.

To determine the amount of gain or loss on the sale of an interest in property, you must first need to know the basis in that property. Generally, the basis of property is either the transferor's basis, if the transferor made a gift of the property while still living, or the fair market value at the time of the transfer if it was a testamentary gift. However, the value of a remainder interest is not the full value of the property, because someone else has an intervening right to its use.

The value of the remainder interest is equal to the undivided value of the property minus the value of the intervening interest. The value of this interest depends on applicable interest rates and the duration of the interest. In the case of a life estate, the duration depends on the age of the recipient and is determined with reference to mortality tables published in the Treasury regulations. The applicable interest rate is specified in Code Sec. 7520 as being 120 percent of the applicable federal rate (AFR) for that month, rounded to the nearest 0.2 percent. You may find these tables at the IRS web site.

IRS Pub. 1457 is known as Actuarial Values Book Aleph and contains tables that express the values of life estates, term interests and remainders. In this publication, you will need to select the appropriate section based on whether the interest is a term for years or a life estate. In each section is a series of tables based on interest rates ranging from 2.2 to 22.2 percent. Find the age of the life estate holder or duration of the term in the first column of the table. Next to it, under the column for remainder interests, is a decimal representation of the fractional interest represented by the remainder. Multiply this decimal by the basis of the property and you have the basis of the remainder interest.

Examples: Bob's grandfather died in March of 2009 and left a house valued at $100,000 to his mother for life, with the remainder interest to Bob. Bob's mother is 65 years old. The Sec. 7520 rate for that month is 2.4 percent, and the fractional value of the remainder is .67881. The value of Bob's interest in the house is $67,881.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

For U.S. taxpayers, owning assets held in foreign countries may have a variety of benefits, from ease of use for frequent travelers or those employed abroad to diversification of an investment portfolio. There are, however, additional rules and requirements to follow in connection with the payment of taxes. Some of these rules are very different from those for similar types of domestic income, and more than a few are quite complex.

Two documents do not apply directly to federal income taxation, but are nevertheless highly important. The first of these is a Treasury form, Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts. Any individual or organization that owns or has control over a bank or brokerage account must complete this form if the aggregate value of all such accounts under that taxpayer's ownership or control exceeds $10,000. The second such form is not a requirement per se, but taxpayers who have income in a foreign country with which the United States has a treaty would be seriously remiss in failing to complete it. IRS Form 8802, Application for United States Residency Certification, helps to speed and simplify the application process for eligible taxpayers claiming the benefits of tax treaties in connection with foreign taxes paid. Requirements for organizations that may have dual or layered status offer complications that depend on the type of entity, so these instructions must be parsed carefully.

Taxes on real and personal property held overseas are treated quite differently for purposes of federal income taxation, as opposed to the treatment of domestic property. Individuals may claim foreign real property taxes as itemized deductions on Schedule A of Form 1040, just as they would with U.S. real estate. However, taxes on personal property may only be deductible if used in connection with a trade or business or in the production of income.

U.S. taxpayers who own homes in foreign countries are eligible for the capital gains exclusion on the sale of a principal residence subject to the same requirements as domestic homeowners. Likewise, if a taxpayer derives rental income from a home, the rules for reporting income and deductions are the same. However, claiming depreciation expenses in connection with rental income subjects taxpayers to a different set of rules. Code Sec. 168(g) indicates that tangible property used predominantly outside the United States must be depreciated using the alternative depreciation system (ADS), rather than the modified accelerated cost recovery system (MACRS), and involves longer recovery periods. This is true whether the tangible property in question is the residence itself or household appliances contained therein, as well as any other tangible property.

Intangible property such as patents, licenses, trademarks, copyrights and securities produce a variety of types of income, and the taxation of such income may be subject to different rules than similar domestic income. The provisions for taxation of foreign income are often subject to modification by treaty, and the United States has negotiated treaties with over sixty nations.

Income from all sources must be reported in U.S. dollars, regardless of how it is paid. One exception to this rule is that if income is received in a currency that is not convertible to U.S. dollars because of prohibitions placed on conversion by the issuing country, then the taxpayer may choose when to report the income. The income may be reported either in the year earned, according to the most accurate valuation means available, with the taxes paid from other income, or the taxpayer may choose to wait until the currency becomes convertible again.

The federal government makes a lot of money from interest people owe on their taxes. Unless you are proactive, interest will accrue and before you know it, your original tax bill will be much higher. You can stop interest from accruing if you act early. Thanks to a new law, the government will also pay you interest in some cases.

The federal government makes a lot of money from interest people owe on their taxes. Unless you are proactive, interest will accrue and before you know it, your original tax bill will be much higher. You can stop interest from accruing if you act early.

When you are under examination, interest on possible underpayments continues to accrue while you and the IRS dispute liability. If the IRS issues a notice of deficiency, you pay interest on the underpayment from the original due date of the return until the date of payment. The amount of interest that can accrue is often very large.

Traditionally, you had two choices to stop the running of interest. You could pay the tax, which would suspend further interest from accruing, and file a refund claim. If you went down this route, you could not contest the liability in the U.S. Tax Court but had to go to a district court for relief. Alternatively, you could make "a deposit in the nature of a cash bond."

A deposit in the nature of a cash bond stops the running of interest on an amount of underpayment equal to the deposit. However, if you ultimately prevail, your deposit doesn't earn any interest.

Deposits for future underpayments

Taxpayers can deposit cash with the IRS to subsequently pay an underpayment of income, estate, gift, or generation-skipping transfer tax. If the IRS ultimately prevails, you will only have to pay interest on the deposit from the original due date of your return until the day you made the deposit.

Here's an example:

Kendra, a calendar-year taxpayer, deposits $20,000 with the IRS on June 15, 2007 because of a dispute over her 2006 income taxes. On July 1, 2009, the IRS and Kendra agree that she underpaid her 2006 taxes by $30,000. The $20,000 deposit is applied toward the underpayment. Kendra pays the $10,000 outstanding on the same date. Kendra will owe interest on the $10,000 from April 15, 2006 (the due date of her return) to July 1, 2097. However, she will only pay interest on the $20,000 deposit from April 15, 2007 (the due date of her return) to June 15, 2007 (the date she deposited the $20,000).

If you ultimately prevail in your dispute with the IRS, the government must now pay you interest on your deposit. The government will also pay you interest if you decide to withdraw the deposit before your dispute is resolved. You will be paid interest at the federal short-term rate compounded daily.

Written statement is necessary

Along with your check or money order, you must send a letter designating the money as a deposit. If you don't designate your check or money order as a deposit, the IRS will treat it as a payment.

The written statement must identify the:

Type of tax;

Tax years; and

Amount and basis for the disputed tax.

You can also designate a deposit in the nature of a cash bond as a deposit under the new rules.

Return of your deposit

Sometimes, you may want to request a return of your deposit. Again, you must make your request in writing. The IRS needs to know the date and amount of the original deposit, the type of tax and the tax years.

Our office can help you determine if making a deposit is the best strategy for you. Give us a call today.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay employment taxes on a calendar-year basis. The reporting rules apply to both FICA and FUTA taxes, as well as to income taxes that domestic employees elect to have withheld from their wages. The FICA tax rate, applied separately to the employer's share and the employee's share, is 7.65 percent.

If you pay for domestic-type services in your home, you may be considered a "domestic employer" for purposes of employment taxes. As a domestic employer, you in turn may be required to report, withhold, and pay social security and Medicare taxes (FICA taxes), pay federal unemployment tax (FUTA), or both.

The tax on household employees is often referred to as "the nanny tax." However, the "nanny tax" isn't confined to nannies. It applies to any type of "domestic" or "household" help, including babysitters, cleaning people, housekeepers, nannies, health aides, private nurses, maids, caretakers, yard workers, and similar domestic workers. Excluded from this category are self-employed workers who control what work is done and workers who are employed by a service company that charges you a fee.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What and when you need to pay

If you pay cash wages of $1,700 or more in 2009 to any one household employee, then you must withhold and pay social security and Medicare taxes (FICA taxes). The taxes are 15.3 percent of cash wages. Your employee's share is 7.65 percent (you can choose to pay it yourself and not withhold it). Your share is a matching 7.65 percent.

If you pay total cash wages of $1,000 or more in any calendar quarter of 2008 or 2009 to household employees, then you must pay federal unemployment tax. The tax is usually 0.8 percent of cash wages. Wages over $7,000 a year per employee are not taxed. You also may owe state unemployment tax.

The $1,700 threshold

If you pay the domestic employee less than $1,700 (an inflation adjusted amount applicable for 2009), in cash wages in 2009, or if you pay an individual under age 18, such as a babysitter, irrespective of amount, none of the wages you pay the employee are social security and Medicare wages and neither you nor your employee will owe social security or Medicare tax on those wages.You need not report anything to the IRS.

If you pay the $1,700 threshold amount or more to any single household employee (other than your spouse, your child under 21, parent, or employee who under 18 at any time during the year) then you must withhold and pay FICA taxes on that employee. Once the threshold amount is exceeded, the FICA tax applies to all wages, not only to the excess.

As a household employer, you must pay, at the time you file your personal tax return for the year (or through estimated tax payments, if applicable), the 7.65 percent "employer's share" of FICA tax on the wages of household help earning $1,700 or more. You also must remit the 7.65 percent "employee's share" of the FICA tax that you are required to withhold from your employee's wage payments. The total rate for the employer and nanny's share, therefore, comes to 15.3 percent.

Withholding and filing obligations

Most household employers who anticipate exceeding the $1,700 limit start withholding right away at the beginning of the year. Many household employers also simply absorb the employee's share rather than try to collect from the employee if the $1,700 threshold was initially not expected to be passed. Domestic employers with an employee earning $1,700 or more also must file Form W-3, Transmittal of Wage and Tax Statements, and provide Form W-2 to the employee.

Household employers report and pay employment taxes on cash wages paid to household employees on Form 1040, U.S. Individual Income Tax Return, Schedule H, Household Employment Taxes. These taxes are due April 15 with your regular annual individual income tax return. In addition, FUTA (unemployment) tax information is reported on Schedule H. If you paid a household worker more than $1,000 in any calendar quarter in the current or prior year, as an employer you must pay a 6.2 percent FUTA tax up to the first $7,000 of wages.

Household employers must use an employer identification number (EIN), rather than their social security number, when reporting these taxes, even when reporting them on the individual tax return. Sole proprietors and farmers can include employment taxes for household employees on their business returns. Schedule H is not to be used if the taxpayer chooses to pay the employment taxes of a household employee with business or farm employment taxes, on a quarterly basis.

Deciding who is an employee is not easy. If you have any further questions about how to comply with the tax laws in connection with household help, please feel free to call this office.

This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.

This is a simple question, but the question does not have a simple answer. Generally speaking the answer is no, closing costs are not deductible when refinancing. However, the answer depends on what you mean by "closing costs" and what is done with the money obtained in the refinancing.

Costs added to basis. Certain expenses paid in connection with the purchase or refinancing of a home, regardless of when paid, are capital expenses that must be added to the basis of the residence. These include attorney's fees, abstract fees, surveys, title insurance and recording or mortgage fees. Adding these costs to basis will lower any capital gain tax that you pay when you eventually sell your home. If your gain is sheltered anyway by the home sale exclusion of $250,000 ($500,000 for couples filing jointly) on the eventual sale of a principal residence, any previous addition to basis, while doing no harm, will also do no good.

Interest expense.Taxpayers may deduct qualified residence interest, however. "Qualified residence interest" is interest that is paid or accrued during the tax year on acquisition or home equity indebtedness with respect to a qualifying residence.

Points. Points are charges paid by a borrower to obtain a home mortgage. Other names used for deductible points are loan origination fees, loan discounts, discount points and maximum loan charges. While a fairly broad rule permits the deduction of home mortgage interest, the rule governing the deduction of points is narrower and has a number of restrictions. Points paid to refinance a mortgage on a principal residence, like other pre-paid interest that represents a charge for the use of money, are generally not deductible in the year paid and must be amortized over the life of the mortgage. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Prepayment penalties. In cases where a creditor accepts prepayment of a secured debt, such as a mortgage debt on a home, but imposes a prepayment penalty, the prepayment penalty is deductible as interest.

Applicable forms. To deduct home mortgage interest and points, you must file Form 1040 and itemize deductions on Schedule A; the deduction is not permitted on Form 1040EZ.

With all the different tax breaks for taxpayers with children - from the Earned Income Tax Credit (EITC) to the dependent care and child tax credits - you may be wondering who exactly is a "child" for purposes of these incentives. Is there a uniform definition in the Tax Code, or does the definition of a "child" vary according to each tax break?

With all the different tax breaks for taxpayers with children - from the Earned Income Tax Credit (EITC) to the dependent care and child tax credits - you may be wondering who exactly is a "child" for purposes of these incentives. Is there a uniform definition in the Tax Code, or does the definition of a "child" vary according to each tax break?

Generally, a qualifying child for purposes of each tax break requires four tests to be met: relationship, age, residency, and citizenship. This article discusses the definition of "child" for purposes of the EITC, dependent care credit, child tax credit, and dependency exemption.

Child Tax Credit

The child tax credit provides eligible individuals to take an income tax credit of $1,000 for each qualifying child under the age of 17 at the end of the calendar year. The child tax credit is refundable for some taxpayers, but is phased-out for higher-income taxpayers.For purposes of the child tax credit, a qualifying "child" is a child who:

-- Is under the age of 17 at the close of the calendar year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lives with you for more than half of the tax year; and

-- Is a U.S. citizen, U.S. resident or U.S. national.

Child and Dependent Care Credit

Taxpayers who incur expenses to care for a child under the age of 13 (or for an incapacitated dependent or spouse) in order to work or look for work can claim the child and dependent care credit, which equals 20 percent to 35 percent of employment-related expenses. Both dollar and earned income limits on creditable expenses apply.For purposes of the child and dependent care credit, a qualifying "child" is generally a child who:

-- Is under the age of 13 when the care was provided;

-- Lives with you for more than half of the tax year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Did not provide more than half of his or her own support for the year.

Earned Income Tax Credit

Eligible lower-income taxpayers with earned income can qualify for the refundable Earned Income Tax Credit (EITC). The credit is phased in as earned income increases, and phased out after earned income exceeds the applicable ceiling. The ceilings and thresholds vary based on the number of the taxpayer's qualifying children. A qualifying "child" for purposes of the EITC is generally a child who:

-- Is under the age of 19, under the age of 24 if a full time-student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person; and

-- Lived with you in the U.S. for more than half of the year.

Dependency Exemption

For purposes of the dependency exemption, a qualifying child is generally a child who:

-- Is under the age of 19, or under age 24 if a full-time student, at the end of the year;

-- Is your son, daughter, stepson, stepdaughter; foster child; legally adopted child or child placed with your for legal adoption; brother, sister, stepbrother, stepsister, or foster child placed with you by an authorized placement agency or court order; or descendant of any such person;

-- Lived with you with you for more than half of a year; and

-- Did not provide more than half of his or her own support for the year.

If you have questions about any of these tax breaks, please call our office. We can help determine if you are eligible for these and other tax incentives related to your children.

The American Jobs Creation Act of 2004 (2004 Jobs Act) changed the rules for start-up expenses in both favorable and unfavorable ways. Start-up expenditures are amounts that would have been deductible as trade or business expenses, had they not been paid or incurred before the business began. Prior to the 2004 Jobs Act, a taxpayer had to file an election to amortize start-up expenditures over a period of not less than 60 months, no later than the due date for the tax year in which the trade or business begins.

The American Jobs Creation Act of 2004 (2004 Jobs Act) changed the rules for start-up expenses in both favorable and unfavorable ways. Start-up expenditures are amounts that would have been deductible as trade or business expenses, had they not been paid or incurred before the business began. Prior to the 2004 Jobs Act, a taxpayer had to file an election to amortize start-up expenditures over a period of not less than 60 months, no later than the due date for the tax year in which the trade or business begins.

Effective for amounts paid or incurred after October 22, 2004, the new law allows taxpayers to elect to deduct up to $5,000 of start-up expenditures in the tax year in which their trade or business begins. The $5,000 amount must be reduced (but not below zero) by the amount by which the start-up expenditures exceed $50,000. The remainder of any start-up expenditures, those that are not deductible in the year in which the trade or business begins, must be ratably amortized over the 180-month period (15 years) beginning with the month in which the active trade or business begins. Similar rules apply to organizational expenses incurred by corporations.

Partnerships may also elect to deduct up to $5,000 of their organizational expenditures, reduced by the amount by which such expenditures exceed $50,000, for the tax year in which the partnership begins business. The remainder of any organizational expenses can be deducted ratably over the 180-month period beginning with the month in which the partnership begins business.

The new provision benefits smaller businesses that have around $5,000 of start-up or organizational expenditures. Larger start-ups, however, will now be required to amortize most or all of these expenses over 15 years rather than the five-year period provided under the prior rules.

In certain cases, tax planning may be useful in defining a new line of business as the continuation of any existing business rather than the start of a new business. In other situations, getting an immediate $5,000 write off is the best possible scenario. If you are thinking of starting a new business or a new business undertaking, this office may be able to help you structure your start-up expenses in the best possible tax situation.

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

FAQ: Must I retain original business expense receipts if I computer scan them?

No, taxpayers may destroy the original hardcopy of books and records and the original computerized records detailing the expenses of a business if they use an electronic storage system.

Business often maintain their books and records by scanning hardcopies of their documents onto a computer hard drive, burning them onto compact disc, or saving them to a portable storage device. The IRS classifies records stored in this manner as an "electronic storage system." Businesses using an electronic storage system are considered to have fulfilled IRS records requirements for all taxpayers, should they meet certain requirements. And, they have the freedom to reduce the amount of paperwork their enterprise must manage.

Record-keeping requirements

Code Sec. 6001 requires all persons liable for tax to keep records as the IRS requires. In addition to persons liable for tax, those who file informational returns must file such returns and make use of their records to prove their gross income, deductions, credits, and other matters. For example, businesses must substantiate deductions for business expenses with appropriate records and they must file informational returns showing salaries and benefits paid to employees.

It is possible for businesses using an electronic storage system to satisfy these requirements under Code Sec. 6001. However, they must fulfill certain obligations.

Paperwork reduction

In addition, using an electronic storage system may allow businesses to destroy the original hardcopy of their books and records, as well as the original computerized records used to fulfill the record-keeping requirements of Code Sec. 6001. To take advantage of this option, taxpayers must:

(1) Test their electronic storage system to establish that hardcopy and computerized books and records are being reproduced according to certain requirements, and

(2) Implement procedures to assure that its electronic storage system is compliant with IRS requirements into the future.

Our firm would be glad to work with you to meet the IRS's specifications, should you want to establish a computerized recordkeeping system for your business. The time spent now can be worth considerable time and money saved by a streamlined and organized system of receipts and records.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

The Electronic Federal Tax Payment System (EFTPS) allows individuals and businesses to make tax payments by telephone, personal computer or through the Internet.

Paperless

EFTPS is one of the most user-friendly programs developed by the IRS. EFTPS is totally paperless. Everything is done by telephone or computer. Because it's electronic, it's available 24 hours a day, seven days a week.

You make your tax payments electronically by:

· Calling EFTPS; or

· Using special computer software or the Internet.

Who can use EFTPS

EFTPS is available to businesses and individuals but businesses have more options.

Businesses: If your total deposits of federal taxes are more than $200,000 each year, you must use EFTPS. If not, you can still use EFTPS but you're not required to.

To calculate the $200,000 threshold, you have to include every federal tax your business pays, such as payroll, income, excise, social security, railroad retirement, and any other federal taxes.

The IRS wants businesses to use EFTPS and makes it difficult to stop using it. Once you meet the $200,000 threshold, you have to continue using EFTPS even if your annual tax deposits fall below $200,000 in the future.

Individuals: Individuals can also use EFTPS. Many of the individuals using EFTPS are making quarterly estimated tax payments but it's also available to people paying federal estate and gift taxes and installment payments.

How EFTPS works

There are two versions of EFTPS: direct and through a financial institution.

Direct: EFTPS-Direct is just what the name suggests. You access EFTPS directly - by telephone or computer - and make your tax payments. You tell EFTPS when you want to deposit your taxes and on that date EFTPS tells your bank to transfer the funds from your account to the IRS. At the same time, the IRS updates your payroll tax records to reflect the deposit.

Example. Your payroll taxes are due on the 15th. You have to contact EFTPS by 8PM at least one day before your tax due date. You either call EFTPS or log-on using special software or through the Internet. You enter your payment and EFTPS automatically debits your bank account and transfers the funds to the IRS on the date you indicate.

If you're a business, you can schedule your tax deposits up to 120 days before the due date. Individuals can schedule tax deposits up to 365 days before the due date.

Through a financial institution: You can also access EFTPS through a bank or credit union. Instead of contacting EFTPS directly and making your tax payments, your bank does it for you. Not all banks and credit unions participate in EFTPS so you have to check with your financial institution.

Only businesses can use EFTPS through a financial institution. If you're an individual and you want to use EFTPS, you have to use it directly. Also, while EFTPS-Direct is free, some financial institutions charge a fee for accessing EFTPS.

Getting started

To access EFTPS, you have to enroll. Your tax advisor can help you navigate the enrollment process and, once you're part of EFTPS, he or she can make the payments for you.

A: Certain investment-related expenses are deductible, others are specifically restricted. Still others won't get you a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Certain investment-related expenses are deductible, while others are specifically restricted. Still other expenses likely will not provide you with a deduction, but you will be able to add them to your tax basis in the underlying investment, or net them from the amount you are otherwise considered to have received on its sale.

Investor expenses

Investment counsel fees, custodian fees, fees for clerical help, office rent, state and local transfer taxes, and similar expenses that you pay in connection with your investments are deductible as an itemized deduction on Schedule A of Form 1040, subject to the 2% floor for all such itemized deductions.

Travel expenses related to the production or collection of income are deductible if you provide proof both of the expenses and the necessity for incurring them. Deductions for travel expenses related to attending investment seminars, however, are specifically prohibited. Travel expenses to attend stockholder meetings are permissible deductions only if travel is not for personal reasons and expenses are reasonable in relation to value of the investment.

Interest expenses

If you take out a loan to carry investment property, you are entitled to an itemized deduction for the interest you pay, reported on Form 4952, which is limited to your net investment income (dividends, interest, rents, etc.) Margin interest paid connected with your stock portfolio qualifies. The investment interest deduction is not subject to the 2% floor - you can start with deducting the first dollar of interest paid. Any disallowed interest over the net investment income limit can be carried over to a succeeding tax year.

Caution. Net capital gain from the disposition of investment property is not considered investment income. However, you may elect to treat all or any portion of such net capital gain as investment income by paying tax on the elected amounts at their ordinary income rates. This is usually not advisable.

Brokerage commissions

Brokerage commissions related to a particular stock purchase or sell, on the other hand, are considered a cost of the sale itself. As such, any commissions paid to buy a stock are added to your tax basis in the shares, which will later determine the amount of taxable gain you have when the property is sold. Any commission on the sale of the shares is netted from the amount you will be considered to realize on that sale.

New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years. You could realize some significant tax savings.

Once you retire or reach age 70 ½ (depending on your retirement plan), the law requires that you start making -at a minimum-some periodic withdrawals. These withdrawals are called required minimum distributions.

Why required minimum distributions?

First, the tax policy behind letting you save in a tax-deferred account was to allow you to use those funds in your retirement, rather than to use them as just another way to build up your estate for your heirs. Second, because those accounts are usually tax-deferred, withdrawals after retirement are taxed to you as ordinary income. As a result, the IRS wants you to withdraw at least a minimum amount from those accounts each year so that it can be taxed.

New IRS rules substantially simplify the computation of required minimum distributions (RMDs). In addition, Congress has forced the IRS to adopt new life expectancy tables that reflect longer life expectancies, resulting in distributions to be made over a longer time-period and for the RMD to be smaller than would have been required in previous years.

Good tax news

Good news for taxpayers who are interested in retaining funds in their IRAs and their tax-qualified plans because it means deferring income tax on the funds even longer.

If you are alive in the year in which you must begin required minimum distributions, your new MRD is calculated each year by dividing the account balance
by your life expectancy, as determined by the uniform distribution period table (the "Uniform Table") in the new IRS rules.

Example. At the time his required beginning date is reached (usually retirement or 70 ½), John Smith had a balance of $1 million in his IRA, as of the previous December 31. He previously named a beneficiary, who is age 67.

The difference in the computation of the RMD under the new rules is dramatic.

Under pre-2001 rules, he checks the joint and last survivor table and finds that his divisor for his $1 million account is 22.

Under revised rules in effect in 2001, his divisor is 26.2.

Under the new Uniform Lifetime Tables now in effect, his divisor is 27.4.

The difference in required distributions is significant.

Under pre-2001 rules, John must withdraw at least $45,454 this year

.

Under the 2001 rules, John must withdraw at least $38,168 this year.

Under the new tables, John must withdraw at least $36,496 this year.

Because of the new regulations, John has an extra $8,958 in his IRA at the end of the year over what he could have kept under the rules only a few years ago. This amount can then continue to accumulate earnings. This savings can be realized-and compounded-every subsequent year for the next 27 years. As a bonus, John's federal income tax (assuming a marginal rate of 35 percent) is more than $3,135 less ($12,773 instead of $15,908).

If you die before reaching your retirement having designated your spouse as beneficiary, distributions must begin by December 31 of the year following your death or the year that you would have turned 70½, whichever is later. At that time, RMD is computed over your spouse's life expectancy.

Caution!

The new rules-although more flexible-leave little room for mistakes in timing. Failure to take the minimum required distribution by the RBD will result in a 50 percent excise tax equal to half of the amount that should have been paid out but wasn't. Although early versions of proposed legislation included a decrease in the penalty from 50 percent to 10 percent, that provision is not the law.

If you'd like more specific advice on how the new Minimum Required Distribution rules apply to your retirement strategies, please contact this office.

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

Q: An extension to file my tax return seems such a painless procedure, is there any good reason for me not to postpone my filing deadline to avoid just one more hassle during the busy start of Spring?

A: Many taxpayers unrealistically and, to their own detriment, believe that when the IRS grants them an extension to file their tax return, it is the "magic wand" that waves away all tax concerns until the extended filing deadline is upon them. This is not the case. Even though getting extensions has been made easier--individuals can obtain an automatic four-month extension by phone, the mail or computer, and an additional two months is granted for qualifying taxpayers--there are drawbacks, and certainly "no free rides."

When a taxpayer gets an extension to file his or her return, this does not mean that he or she has more time in which to pay any taxes that are owed without interest or penalty. An extension to file also does not extend the time for payment of taxes. Your ultimate tax liability is an official obligation that starts on April 15th, 2008. You don't have to pay; but if you don't pay, interest charges (currently 7 percent, compounded daily) are applicable to any tax unpaid after the regular deadline. And that may only be the start.

If payments by the regular deadline are less than 90 percent of the actual 2007 tax, the IRS also has the right to asses a 0.5 percent per month late filing penalty. In addition, you must properly estimate the amount of total tax liability based on current information when filing for an extension. If the IRS later determines that estimate to be unreasonable, it can treat the extension as completely void and assess hefty failure-to-file penalties.

An extension, and not filing until October 15th also means that you won't receive a stimulus rebate check (up to $600 for individuals and $1,200 for joint filers, not including any applicable $300 rebate for a qualifying child) until November or early December, rather than based on the May through July distribution schedule for those filing their 2007 returns by the regular April 15th, 2008 deadline.

Some procedural pitfalls can also surprise taxpayers who had every intention of making a proper extension request. For example, if a husband and wife file separate returns, an automatic extension application filed by one does not give an extension of the filing time to the other.

It's always nice to have extra cash lying around in your business. Say you've had a good year, but you want to wait awhile before plowing the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

It's always nice to have extra cash lying around in your business. Perhaps you've had a good year, but want to wait awhile before putting the profits back into the business. Are there any potential tax problems involved if you keep that extra cash in your business' investment account rather than withdrawing it to put in your own personal portfolio? You bet there are ... if you operate your business as a regular taxable corporation.

The accumulated earnings tax trap

If your business is taxed as a regular "C" corporation and the IRS believes that your corporation has retained cash beyond "the reasonable needs of the business," it can assess an additional tax on the corporation, in addition to normal corporate income taxes. The tax is called the accumulated earnings tax.

For tax years beginning before 2011, the accumulated earnings tax is equal to 15 percent of accumulated taxable income. Accumulated taxable income is taxable income, with adjustments, reduced by dividends paid deduction and earnings accumulated for reasonable business needs or minimum credit amount.

For tax years beginning after 2010, the rate of the accumulated earnings tax, which is imposed on the excess accumulated taxable income, is imposed at the highest rate of tax for single individuals. Currently, the highest tax rate for individuals is 35 percent, but may rise back to 39 percent in 2010 under proposals set forth by the Obama Administration.

If your business is either unincorporated or is taxed as a pass-through entity such as a Subchapter S corporation, it is not subject to the accumulated earnings tax. You get a "free pass" on the accumulated earnings tax because all profits are "passed through" to you as the owner automatically, with usually nothing paid on the corporate or entity level.

Avoiding accumulated earnings tax

What does your corporation need to do to demonstrate to the IRS that its current amount of retained earnings does not exceed the reasonable needs of the business?

IRS rules list the following as acceptable grounds for accumulating income:

(1) Business expansion and plant replacement,

(2) Acquisition of a business through purchase of stock or assets,

(3) Debt retirement,

(4) Working capital, and

(5) Investments or loans to suppliers or customers necessary for the maintenance of the corporation's business.

On the other hand, unacceptable grounds for accumulating income are:

(1) Loans to shareholders and expenditures for their personal benefit,

(2) Loans to relatives and friends of shareholders or to others with no reasonable connection with the business,

(3) Loans to a related corporation (common ownership),

(4) Investments that are not related to the business, and

(5) Accumulations to protect against unrealistic hazards.

Worse yet - the personal holding company tax

If -- due to a large surplus in your business' cash account in any particular year-- the investment income from your corporation becomes its main source of income, watch out! Your business may qualify as a "personal holding company." A personal holding company tax is imposed on any corporation that meets the definition of a personal holding company even if the corporation was formed for legitimate business reasons. Personal holding companies are subject to an additional tax on any undistributed personal holding company income.

Any and all undistributed earnings of a personal holding company are subject to a 15 percent penalty tax in 2009 and 2010. This tax is imposed on top of the regular corporate income tax. Although the personal holding company tax should usually be avoided at all cost, it nearly always can be avoided with some planning.

If you anticipate holding more of your business profits than usual on the sidelines as cash for a while, please contact this office. We can make certain that you don't fall into a tax-trap situation that might otherwise be overlooked.

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

Q. My husband and I have a housekeeper come in to clean once a week; and someone watches our children for about 10 hours over the course of each week to free up our time for chores. Are there any tax problems here that we are missing?

A. Cooking, cleaning and childcare: domestic concerns - or tax issues? The answer is both. A few years ago, several would-be Presidential appointees were rejected -- when it was revealed that they had failed to pay payroll taxes for their domestic help. The IRS is aggressively looking for cheaters so it's particularly important that you don't stumble through ignorance in not fulfilling your obligations.

Who is responsible

Employers are responsible for withholding and paying payroll taxes for their employees. These taxes include federal, state and local income tax, social security, workers' comp, and unemployment tax. But which domestic workers are employees? The housekeeper who works in your home five days a week? The nanny who is not only paid by you but who lives in a room in your home? The babysitter who watches your children on Saturday nights?

In general, anyone you hire to do household work is your employee if you control what work is done and how it is done. It doesn't matter if the worker is full- or part-time or paid on an hourly, daily, or weekly basis. The exception is an independent contractor. If the worker provides his or her own tools and controls how the work is done, he or she is probably an independent contractor and not your employee. If you obtain help through an agency, the household worker is usually considered their employee and you have no tax obligations to them.

What it costs

In general, if you paid cash wages of at least $1,300 in 2001 to any household employee, you must withhold and pay social security and Medicare taxes. The tax is 15.3 percent of the wages paid. You are responsible for half and your employee for the other half but you may choose to pay the entire amount. If you pay cash wages of at least $1,000 in any quarter to a household employee, you are responsible for paying federal unemployment tax, usually 0.8 percent of cash wages.

Deciding who is an employee is not easy. Contact us for more guidance.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

In 2009, individuals saving for retirement can take advantage of increased contribution limits for various retirement plans. More money can be socked away with tax advantages like tax-deferred growth and possible tax-deductibility.

Traditional IRAs

Individuals who receive compensation and who are not age 70½ or older can make contributions to Individual Retirement Accounts (IRAs). Money saved in a traditional IRA is not taxed until you take it out. Contributions are tax deductible.

For 2009, the maximum amount you can contribute to an IRA is $5,000 (not including rollover contributions) if you are under the age of 50. Individuals age 50 or older can add $1,000 for a total contribution of $6,000 in 2009. These are so-called "catch-up" contributions to help older workers save for retirement. Keep in mind, your contribution may be limited if your income is higher than thresholds set by Congress and you participate in certain employer-sponsored retirement plans. Sometimes, a taxpayer can also contribute to his or her spouse's IRA.

Deductible contributions to a traditional IRA must be made on or before April 15, 2009 (which is generally the deadline to file your federal individual income tax return).

Roth IRAs

Contributions to a Roth IRA are not deductible. Contributions, therefore, are made with after-tax dollars. However, income accrued on Roth IRA contributions is not taxed when it is withdrawn if it is a qualified distribution. A qualified distribution is any one of the following: -- On or after the date the individual attains age 59 ½;

-- For a qualified first-time home purchase

-- To a beneficiary or to the estate of the individual on or after the death of the individual; or

-- As a result of the individual becoming disabled.

As with a traditional IRA, the maximum annual contribution to a Roth IRA is $5,000 in 2009. And, like a traditional IRA, individuals who are 50 or older can make an additional $1,000 in "catch-up" contributions, for a total of $6,000.

Note. For tax years beginning after December 31, 2009, a taxpayer can convert a traditional IRA or make rollover from an eligible retirement plan to a Roth IRA without regard to the his or her income and without regard to whether he or she is a married individual filing a separate return. For conversions taking place before 2010, the taxpayer's adjusted gross income (AGI) cannot exceed $100,000 and the taxpayer cannot be a married individual filing a separate return. For conversions taking place in 2010, the taxpayer recognizes the conversion amount ratably in AGI in 2011 and 2012, unless the taxpayer elects to recognize it all in 2010. However, 2009 is a perfect year to start planning in order to take advantage of the new Roth IRA rules.

401(k)s

An employee can defer as much as $16,500 in 2009 on a pre-tax basis under a 401(k) plan. Employees who are 50 years old by the end of the plan year may make additional "catch-up" payments of up to $5,500 in 2009 (for a total contribution of $22,000). "Catch-up" contributions are also pre-tax, but only can be made if the plan permits. Employers can also make 401(k) contributions for their employees' benefit. In general, an employer's matching 401(k) contributions are not subject to the same annual limit as are employee contributions.

SIMPLE IRA and 401(k) plans

Employers can establish a Savings Incentive Match Plan for Employees (SIMPLE) if 100 or fewer of its employees received at least $5,000 in compensation from the employer last year. Eligible employees can make contributions of up to $11,500 in 2009 (indexed for inflation). Employees who are 50 and over can make additional catch-up contributions of $2,500 in 2009 (for a total of $14,000). Employer contributions to the SIMPLE plan are not included in the annual limit.

Tax-shelter annuity arrangements - 403(b) plans

Public school systems and certain types of tax-exempt organizations may provide retirement benefits to their employees through a tax shelter annuity plan, also referred to as a 403(b) plan. In 2009, employees can contribute up to $16,500 to a 403(b) plan and the maximum catch-up contribution is $5,500. As with other retirement plans, employees who are age 50 and above can make catch-up contributions.

Please contact this office if you have any questions concerning how much, or in what combinations, you can save in 2009 for your retirement on a tax-favored basis.